Sovereign defaults and banking crises

By César Sosa‐Padilla. Journal of Monetary Economics, 2018

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Abstract Sovereign defaults feature three key empirical regularities regarding the domestic banking systems: (i) defaults and banking crises happen together, (ii) banks are largely exposed to government debt, (iii) defaults trigger major contractions in bank credit and production. We rationalize these phenomena by extending a traditional default framework to incorporate bankers who lend to both government and firms. When bankers are exposed to government debt, a default generates a banking crisis, which triggers collapses in corporate credit and output. Calibrated to the 2001-02 Argentine default, the model produces equilibrium crises at observed frequencies, sharp credit contractions, and output drops of 7 %.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/8a263b78da2b0d9110d6f3ff5d562b2cf85d061f