The Cost of Defaults: The Impact of Haircuts on Economic Growth
University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 265
19 Pages Posted: 2 Jan 2014
Date Written: December 31, 2013
Abstract
This paper studies the impact of debt default on economic growth taking into account the depth of a debt restructuring. More specifi cally, creditors losses (or haircuts) are used as proxies of the severity of the default episoded. Analyzing 89 defaults in 72 countries over the period 1979-2005, consistently with previous results in this literature, we fi nd that defaults have a negative and signifi cant impact on short-term output growth. Moreover, controlling for the severity of the default through the haircuts size, we fi nd that the severity of the default is indeed correlated with a further contraction in output one year after the default and with a positive increase in output three years after the default. Therefore, the use of a variable which is taken as a proxy of the severity of the default episode allows us to detect a more lasting (and eventually positive) effect of debt default on growth.
Keywords: Haircuts, Output losses, Sovereign defaults
JEL Classification: F34, G15, H63
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