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

  • Jorge Alonso-Ortiz
  • Esteban Colla
  • José-María Da-Rocha
Symposium

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.

Keywords

Default Sovereign debt Financial markets Productivity 

JEL Classification

E30 E44 G15 

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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

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