I am going through a paper on sovereign default by Mendoza and Yue (2012), in which defaults are explained in terms of how firms that use foreign intermediate inputs lose access to international credit markets once the governement defaults on its debt. This means that after a default production decreases and therefore the model predicts that exports should decrease, but whenI look at periods of default of Argentina, Ukraine and Panama, the data tells exactly the opposite: exports increased in the wake of the sovereign default. What can explain this? What papers can I look for?
at periods of default of Argentina, Ukraine and Panama, the data tells exactly the opposite: exports increased in the wake of the sovereign default. What can explain this?
Sovereign default may trigger a depreciation of the domestic currency. When that happens, it has a two-fold effect on the domestic economy: On the one hand, foreign immediate inputs (that is, imports) become more expensive. On the other hand, exports become cheaper (that is, more attractive) to foreign markets.
The net effect depends on the particularities of the economy being analyzed. For instance, a depreciation of the domestic currency might prompt firms to resort to domestic substitutes of the foreign intermediate inputs, in which case the drawback of sovereign default is reduced or mitigated.
An exporter is more immune to the detrimental effect of sovereign default if (1) its need for foreign inputs is not too high, (2) it hedged against a depreciation of the domestic currency, and/or (3) it does not compete for or need subsidies from the government because these could be harder to obtain in the context of sovereign default.