Official or unofficial? extreme bounds analysis on the determinants of sovereign default

Using a panel dataset of 84 economies over 2002 to 2022, we investigate the sensitivity of sovereign default to foreign aid and unofficial economy by employing Sala-I-Martin's Extreme Bounds Analysis (EBA) approach. We find that both of unofficial economy and official economic activity (foreign aid) are important determinants of sovereign default. The findings imply that prioritizing limiting the size of the unofficial economy to increase government revenues, and enhancing the effectiveness of foreign aid would be important ways to increase the financial capacity of developing economies.