Alonso-Ortiz, JorgeJorgeAlonso-OrtizColla-De-Robertis, EstebanEstebanColla-De-RobertisDa-Rocha, José-MaríaJosé-MaríaDa-Rocha2022-10-242022-10-242015https://scripta.up.edu.mx/handle/20.500.12552/169310.1007/s00199-015-0939-yWe 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 TheoryenDefaultSovereign debtFinancial marketsProductivityResource Types::text::journal::journal article