OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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Sovereign defaults

Evidence on the importance of government effectiveness

This paper provides robust empirical evidence that government effectiveness is a key determinant of sovereign defaults. Government effectiveness is measured by a broad-based perception index of the Worldwide Governance Indicators database (WGI) disseminated by the World Bank. Public debt and sovereign default data cover both external and internal government debt. In a systematic and demanding robustness check with any possible sub-sample of a large set of control variables, the effect of government effectiveness is almost always robust. In addition, the effects of the five other main indicators of the WGI database on default risk are also investigated, showing that the rule of law, regulatory quality, control of corruption and voice and accountability are also robustly linked with default risk. Regressions with the mortality of settlers as an instrument indicate a causal effect from government effectiveness to sovereign default.


Keywords: government effectiveness, sovereign default, public debt, institutions
JEL: H63: Public Economics / National Budget, Deficit, and Debt / Debt; Debt Management; Sovereign Debt; E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy; F34: International Economics / International Finance / International Lending and Debt Problems
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