The Domestic Side of Sovereign Defaults
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Sovereign defaults are increasingly affecting liabilities governed by local law and held by local residents. This paper provides an overview of the existing literature on domestic defaults, describes a novel dataset that codifies defaults according to the jurisdiction of the instruments involved, and shows that domestic and foreign-law defaults have different macroeconomic implications. While a default affects economic growth regardless the legal jurisdiction, local-law defaults are more likely to trigger domestic financial instability and credit tightening, and foreign-law defaults are more likely to tighten access to external financing sources.