Working Paper Series I (don’t) owe you: sovereign default and borrowing behavior Dimitris Georgarakos, Alexander Popov Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. No 2893 AbstractUsing microdata from a U.S. household survey, we document that immigrantswho lived through a sovereign default episode are 7% less likely to hold debt rela-tive to otherwise similar immigrants who reside in the same U.S. state and comefrom the same foreign country but who did not experience a default. Conditionalon holding debt, consumers in the former group borrow less and service lowerdebt burdens. The negative effect on borrowing behavior of having experienceda sovereign default increases with family size and declines with education. Thesefindings highlight the role of personal experience in shaping households’ financialdecisions.JEL classification: G11, G51, H63, D83Keywords: Sovereign default, household borrowing, experiences, immigrantsECB Working Paper Series No 28931Non-technical summaryA large literature has documented that household behavior is often shaped by trau-matic economic experience. While at this point we have a good understanding of howcrisis episodes affect consumers’ spending, our knowledge of the effects of such experi-ences on borrowing and indebtedness is quite limited. This is all the more surprisinggiven the importance of access to credit both for individual risk sharing and for ag-gregate economic growth.In this paper, we study how living through a sovereigndefault affects consumers’ borrowing behavior, in the process shedding light on thelink between public and household debts.We use data from the 2004 Survey of Income and Program Participation (SIPP)and utilize a sample of immigrants to the US from 92 countries, in 36 of which (some)immigrants have lived through (at least one) episode of sovereign default. We baseour inference on comparing the borrowing behavior of immigrants who, prior to theirmigration, experienced the sovereign default in their country of origin against similarimmigrants who live in the same state and come from the same country but did not livethrough such a stressful economic event. One distinct feature of our set up is that bothimmigrant groups face similar credit supply conditions in a new economic environmentthat has not been directly influenced by the sovereign default episode in their countryof origin. This allows for distinguishing the role of individual experiences that mainlyunderpin a demand-driven mechanism from supply-side conditions that are typicallytighter for those who have experienced an adverse shock.We find that individuals who have experienced a sovereign default are on average7 percent less likely to hold debt than otherwise similar individuals who em...
