Advanced Search
MyIDEAS: Login

Fear of Sovereign Default, Banks, and Expectations-Driven Business Cycles

Contents:

Author Info

Abstract

What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the \news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www1.carleton.ca/economics/ccms/wp-content/ccms-files/cep13-03.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 13-03.

as in new window
Length: 32 pages
Date of creation: May 2013
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:13-03

Contact details of provider:
Postal: 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada
Phone: 1-613-520-3744
Fax: 1-613-520-3906

Order Information:
Email:

Related research

Keywords: expectations-driven business cycles; sovereign defaults; financial intermediation; news shocks; business cycles; interest rate spreads; capital adequacy requirements.;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers 014, Universidad Torcuato Di Tella.
  2. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  3. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper 08-02, Federal Reserve Bank of Richmond.
  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  5. Robert Kollmann & Zeno Enders & Gernot J. Mueller, 2011. "Global banking and international business cycles," Globalization and Monetary Policy Institute Working Paper 72, Federal Reserve Bank of Dallas.
  6. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
  7. Sosa-Padilla, Cesar, 2012. "Sovereign Defaults and Banking Crises," MPRA Paper 41074, University Library of Munich, Germany.
  8. Robert Kollmann, 2013. "Global Banks, Financial Shocks And International Business Cycles: Evidence From An Estimated Model," CAMA Working Papers 2013-30, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  9. Paul Beaudry & Martial Dupaigne & Franck Portier, 2011. "Modeling News-Driven International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 72-91, January.
  10. Luca Guerrieri & Matteo Iacoviello & Raoul Minetti, 2013. "Banks, Sovereign Debt, and the International Transmission of Business Cycles," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 181 - 213.
  11. Ricardo Nunes & Horacio Sapriza & Bora Durdu, 2011. "News and sovereign default risk in small open economies," 2011 Meeting Papers 1355, Society for Economic Dynamics.
  12. Nir Jaimovich & Sergio Rebelo, 2007. "News and Business Cycles in Open Economies," Discussion Papers 07-016, Stanford Institute for Economic Policy Research.
  13. Christopher Gunn & Alok Johri, 2011. "News and knowledge capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 92-101, January.
  14. Enrique G. Mendoza & Vincenzo Quadrini, 2009. "Financial Globalization, Financial Crises and Contagion," NBER Working Papers 15432, National Bureau of Economic Research, Inc.
  15. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
  16. Christiano, Lawrence & Ilut, Cosmin & Motto, Roberto & Rostagno, Massimo, 2008. "Monetary policy and stock market boom-bust cycles," Working Paper Series 0955, European Central Bank.
  17. Matteo Iacoviello, 2010. "Financial Business Cycles," 2010 Meeting Papers 1053, Society for Economic Dynamics.
  18. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
  19. Silvio Contessi, 2012. "An application of conventional sovereign debt sustainability analysis to the current debt crises," Review, Federal Reserve Bank of St. Louis, issue May, pages 197-220.
  20. Christopher M. Gunn & Alok Johri, 2011. "News, Intermediation Efficiency and Expectations-driven Boom-bust Cycles," Department of Economics Working Papers 2011-02, McMaster University.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.
  2. Bergin, Adele & Conefrey, Thomas & FitzGerald, John & Kearney, Ide & Znuderl, Nusa, 2013. "The HERMES-13 macroeconomic model of the Irish economy," Papers WP460, Economic and Social Research Institute (ESRI).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:car:carecp:13-03. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Renee Lortie).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.