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Finance and Trade: Issue Linkage and the Enforcement of International Debt Contracts
Unformatted Document Text:  27 The parameter estimate for GDP per capita suggests otherwise. If GDP per capita suffered from severe and random measurement error, it would not have proved so consequential in the statistical analysis. On the contrary, the coefficients on GDP per capita in Table 3 carried the anticipated sign and were estimated with a considerable degree of precision. Moreover, variable exerted a powerful effect on compliance. Holding other factors constant, the expected level of compliance rises from approximately 0.3 (for dollar bonds) and 0.4 (for sterling bonds) to nearly 1, as we move across the full range of observed GDP per capita. Moreover, higher income not only increases the expected level of compliance but also heightens the certainty of repayment. If the variable were plagued with measurement error, we probably would not have observed such clean and intuitive results. Thus, measurement error does not seem serious enough to alter our conclusion that trade with the lender exerted no effect on compliance. A related objection concerns the paucity of data during the 1930s. If interwar leaders did not have measures of national income, could they really be expected to base decisions on trade with the lender as a share of GDP? There are two answers. First, policymakers probably had a good intuition about how extensively their economies depended on trade with lenders, even if they could not quantify it to several decimal points. (If leaders could not gauge their level of dependence, then the embargo hypothesis should be rejected immediately.) Second, the conclusions in this section do not depend on the particular measure of trade reliance that was used. I considered two other measures: trade with the creditor as a percentage of all trade, and trade with the creditor in dollars per capita. For both the sterling and dollar bonds, the estimated coefficients on these alternative measures were slightly negative, the opposite of what we would expect given the embargo hypothesis, but with enormous standard errors they were statistically indistinguishable from zero.

Authors: Tomz, Michael.
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27
The parameter estimate for GDP per capita suggests otherwise. If GDP per capita
suffered from severe and random measurement error, it would not have proved so consequential
in the statistical analysis. On the contrary, the coefficients on GDP per capita in Table 3 carried
the anticipated sign and were estimated with a considerable degree of precision. Moreover,
variable exerted a powerful effect on compliance. Holding other factors constant, the expected
level of compliance rises from approximately 0.3 (for dollar bonds) and 0.4 (for sterling bonds)
to nearly 1, as we move across the full range of observed GDP per capita. Moreover, higher
income not only increases the expected level of compliance but also heightens the certainty of
repayment. If the variable were plagued with measurement error, we probably would not have
observed such clean and intuitive results. Thus, measurement error does not seem serious
enough to alter our conclusion that trade with the lender exerted no effect on compliance.
A related objection concerns the paucity of data during the 1930s. If interwar leaders did
not have measures of national income, could they really be expected to base decisions on trade
with the lender as a share of GDP? There are two answers. First, policymakers probably had a
good intuition about how extensively their economies depended on trade with lenders, even if
they could not quantify it to several decimal points. (If leaders could not gauge their level of
dependence, then the embargo hypothesis should be rejected immediately.) Second, the
conclusions in this section do not depend on the particular measure of trade reliance that was
used. I considered two other measures: trade with the creditor as a percentage of all trade, and
trade with the creditor in dollars per capita. For both the sterling and dollar bonds, the estimated
coefficients on these alternative measures were slightly negative, the opposite of what we would
expect given the embargo hypothesis, but with enormous standard errors they were statistically
indistinguishable from zero.


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