Working Papers

2002-09 | September 2002

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A Gravity Model of Sovereign Lending: Trade, Default and Credit

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One reason why countries service their external debts is the fear that default might lead to shrinkage of international trade. If so, then creditors should systematically lend more to countries with which they share closer trade links. We develop a simple theoretical model to capture this intuition, then test and corroborate this idea.

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