(At Least) Four Theories for Sovereign Default

Please note the time of this seminar is 1-2pm.

Abstract

Why do some sovereigns repay their debts while others default? In this study I empirically investigate four prominent theories for sovereign default (or its avoidance): (i) concerns over international reputation, (ii) external threat of sanctions and other forms of direct punishment, (iii) domestic political economy, and (iv) international crisis spillovers. I operationalise each theoretical strand for analysis alongside standard controls and implement them in a common empirical framework, running horseraces for a panel of 114 developing economies covering 1970-2015. I find that macro fundamentals dominate other effects in terms of economic significance, followed by reputation and international spillover effects. There is less convincing evidence for direct punishment effects, while transition to democracy moderately increases the propensity to default. In robustness checks I allow for the theoretical strands to manifest themselves through changes in macro fundamentals, and further conduct a number of sample splitting exercises (by political regime, exchange rate regime, financial development, and time period) — with the exception of differential patterns over time, none of these substantially alter the above conclusions.