DP4683 The Politics Of Debt Crises

Author(s): Caroline Van Rijckeghem , Beatrice Weder di Mauro

Publication Date: October 2004

Keyword(s): sovereign debt crises , political institutions , early warning systems

JEL(s): D27 , F30 , F34

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4683.asp

This paper shows that politics matter in explaining defaults on external and domestic debt obligations. We explore a large number of political and macroeconomic variables using a nonparametric technique to predict safety from default. The advantage of this technique is that it is able to identify complementarities that are not captured in standard probit analysis. We find that political factors matter, and do so in different ways for democratic and non-democratic regimes, and for domestic and external debt. Moreover we find that there is an important complementarity between political and economic conditions, which is essential in explaining the incidence of default.