The productivity cost of sovereign default: evidence from the European debt crisis
Journal
Economic Theory
ISSN
0938-2259
1432-0479
Date Issued
2015
Author(s)
Alonso-Ortiz, Jorge
Da-Rocha, José-María
Type
Resource Types::text::journal::journal article
Abstract
We calibrate the cost of sovereign defaults using a continuous time model, where government default decisions may trigger a change in the regime of a stochastic TFP process. We calibrate the model to a sample of European countries from 2009 to 2012. By comparing the estimated drift in default relative to that in no-default, we find that TFP falls in the range of 3.70–5.88 %. The model is consistent with observed falls in GDP growth rates and subsequent recoveries and illustrates why fiscal multipliers are small during sovereign debt crises. ©Economic Theory