Munich Personal RePEc Archive

Sovereign Defaults and Banking Crises

Sosa-Padilla, Cesar (2017): Sovereign Defaults and Banking Crises.

This is the latest version of this item.

[thumbnail of MPRA_paper_81795.pdf]

Download (1MB) | Preview


Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers who lend to both the government and the corporate sector. When these bankers are highly exposed to government debt, a default triggers a banking crisis, which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to the 2001-02 Argentine default episode, the model is able to produce default in equilibrium at observed frequencies, and when defaults occur credit contracts sharply, generating output drops of 7 percentage points, on average. Moreover, the model matches several moments of the data on macroeconomic aggregates, sovereign borrowing, and fiscal policy. The framework presented can also be useful for studying the optimality of fractional defaults.

Available Versions of this Item

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.