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Abstract

Using the Pseudo-Poisson Maximum Likelihood (PPML) method for a variant of the gravity model we reexamine how the external debt default (renegotiations) affects bilateral trade. Using data from 125 countries for the period 1985 to 2015 we find that the PPML results are in many instances opposite to what the conventional OLS approach yields. We find that bilateral trade with creditors increases while with non-creditor it declines in a sustained manner. This is different than what (Rose, 2005) and (Martinez and Sandleris , 2011) found using the conventional OLS approach. Unlike (Rose, 2005) we find an increase in trade while unlike (Martinez and Sandleris, 2011) we find a sustained increase in trade with creditors. We, however, find support for (Martinez and Sandleris’ ,2011) results in which trade between defaulting countries and non-creditors declines. We also find that better institutions reduce the fluctuations of foreign trade even in the case of external debt default.

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