To default or not? The aftermath of sovereign defaults and IMF programs in economic crises

Abstract

Economic crises are costly and highly disruptive, but does a sovereign default enhance or undermine economic recovery during the crisis? In this study, we approach this question by using a large dataset regarding economic crises after the Second World War. The results indicate that in terms of the real economy, domestic defaults tend to be followed by losses, especially in developing countries facing crises. Defaulting on foreign liabilities yields an equivocal economic outcome depending mostly on the level of economic development. Surprisingly, public debt seems to play no role in outcomes of defaults. We also analyse International Monetary Fund (IMF) programmes and find that they provide a more favourable crisis outcome.