To Default or Not? The Aftermath of Sovereign Defaults and IMF Austerity Programs During Economic Crises

Economic crises are an agonizing feature of modern economies leading to dramatic falls in the real GDP per capita. A crisis can exhaust country's resources forcing it to either apply for an IMF program or to default on its foreign or domestic liabilities. Do these drastic measures aid countries in crisis? In this study, we aim to answer this question using a large dataset on economic crises after the Second World War. Results show that, in terms of the real economy, developing countries should avoid defaults during crises and that domestic default is the most disruptive form of default. The economic outcomes of sovereign defaults are in general unequivocal and depend, e.g., on the level of external debt. IMF programs are found to provide the most lenient crisis outcome