Economic Theory

, Volume 64, Issue 4, pp 611–633 | Cite as

The productivity cost of sovereign default: evidence from the European debt crisis

  • Jorge Alonso-Ortiz
  • Esteban Colla
  • José-María Da-Rocha
Research Article


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.


Default Sovereign debt Financial markets Productivity 

JEL Classification

E30 E44 G15 



We thank T. J. Kehoe and several participants at the 2013 Economic Theory Meeting in Paris for helpful comments. This article has also benefited from helpful comments and suggestions by an anonymous referee.


  1. Aguiar, M., Amador, M., Farhi, E., Gopinath, G.: Crisis and commitment: inflation credibility and the vulnerability to sovereign debt crises. NBER Working Papers 19516, National Bureau of Economic Research, Inc. (2013)Google Scholar
  2. Araujo, A.: General equilibrium, preferences and financial institutions after the crisis. Econ. Theory 58(2), 217–254 (2015)CrossRefGoogle Scholar
  3. Arellano, C., Conesa, J.C., Kehoe, T.: Chronic sovereign debt crises in the Eurozone, 2010–2012. Economic Policy Paper 12-4, Federal Reserve Bank of Minneapolis (2012)Google Scholar
  4. Arellano, C., Ramanarayanan, A.: Default and the maturity structure in sovereign bonds. J. Political Econ. 120(2), 187–232 (2012)CrossRefGoogle Scholar
  5. Arellano, C., Ramanarayanan, A.: Research Department Staff Report 410, Federal Reserve Bank of Minneapolis (2015)Google Scholar
  6. Cole, H., Ohanian, L.E., Leung, R: Deflation and the international great depression: a productivity puzzle. Research Department Staff Report 356, Federal Reserve Bank of Minneapolis (2005)Google Scholar
  7. Cole, H.L., Kehoe, T.: A self-fulfilling model of Mexico’s 1994–1995 debt crisis. J. Int. Econ. 41, 309–330 (1996)CrossRefGoogle Scholar
  8. Cole, H.L., Kehoe, T.: Self-fulfilling debt crises. Rev. Econ. Stud. 67, 91–116 (2000)CrossRefGoogle Scholar
  9. Conesa, J.C., Kehoe, T.: Is it too late to bail out the troubled countries in the Eurozone? Am. Econ. Rev. 104(5), 88–93 (2014)CrossRefGoogle Scholar
  10. Conesa, J.C., Kehoe, T.: Gambling for redemption and self-fulfilling debt crises. NBER Working Papers 21026, National Bureau of Economic Research, Inc. (2015)Google Scholar
  11. Cunha, A.: On the relevance of floating exchange rate policies. Econ. Theory 53(2), 357–382 (2013)CrossRefGoogle Scholar
  12. Da-Rocha, J., Gimenez, E., Lores, F.: Self-fulfilling crises with default and devaluation. Econ. Theory 53(3), 499–535 (2013)CrossRefGoogle Scholar
  13. Danthine, J.-P., Jin, X.: Intangible capital, corporate valuation and asset pricing. Econ. Theory 32(1), 157–177 (2007)CrossRefGoogle Scholar
  14. Davydenko, S.A., Strebulaev, I.A., Zhao, X.: A market-based study of the cost of default. Rev. Financ. Stud. 25(10), 2959–2999 (2012)CrossRefGoogle Scholar
  15. Du, W., Schreger, J.: Local currency sovereign risk. International Finance Discussion Papers 1094, Board of Governors of the Federal Reserve System (US) (2013)Google Scholar
  16. Glober, B.: The expected cost of default. J. Financ. Econ. (2015). doi: 10.1016/j.jfineco.2015.09.007
  17. Guido, L. , Werning, I.: Technical report, MIT (2013)Google Scholar
  18. Harrison, J.M.: Brownian Motion and Stochastic Flow Systems. Wiley, New York (1985)Google Scholar
  19. Hvide, H., Leite, T.: Optimal debt contracts under costly enforcement. Econ. Theory 44(1), 149–165 (2010)CrossRefGoogle Scholar
  20. Krasa, S., Sharma, T., Villamil, A.: Bankruptcy and firm finance. Econ. Theory 36(2), 239–266 (2008)CrossRefGoogle Scholar
  21. Peiris, M.U., Vardoulakis, A.P.: Savings and default. Economic Theory 54(1), 153–180 (2013)Google Scholar
  22. Mateos-Planas, X., Seccia, G.: Consumer default with complete markets: default-based pricing and finite punishment. Econ. Theory 56(3), 549–583 (2014)CrossRefGoogle Scholar
  23. McDaniel, C.: Forces shaping hours in the OECD. Am. Econ. Rev. Macroecon. 3(4), 27–52 (2011)CrossRefGoogle Scholar
  24. Mendoza, E., Yue, V.: A general equilibrium model of sovereign default and business cycles. Q. J. Econ. 127, 889–946 (2012)CrossRefGoogle Scholar
  25. Na, S., Schmitt-Groh, S., Uribe, M., Yue, V: A model of the twin Ds: optimal default and devaluation. CQER Working Paper 2015-1, Federal Reserve Bank of Atlanta (2015)Google Scholar
  26. Nuño Barrau, G., Thomas, C.: Monetary policy and sovereign debt vulnerability. Banco de España Working Papers 1517, Banco de España (2015)Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2015

Authors and Affiliations

  • Jorge Alonso-Ortiz
    • 1
  • Esteban Colla
    • 2
  • José-María Da-Rocha
    • 1
    • 3
  1. 1.CIE-Centro de Investigaciones EconómicasITAMMexico CityMexico
  2. 2.Escuela de Gobierno y Políticas PúblicasUniversidad PanamericanaMexico CityMexico
  3. 3.EUEE-Escuela Universitaria de Estudios EmpresarialesUniversidade de VigoVigo, GaliciaSpain

Personalised recommendations