Institutions, Public Debt and Foreign Finance
AbstractWe study the role of domestic financial institutions in sustaining capital flows to the private and public sector of a country whose government can default on its debt. As in recent public debt crises, in our model public defaults weaken banks' balance sheets, disrupting domestic financial markets. This effect leads to a novel complementarity between private capital inflows and public borrowing, where the former sustain the latter by boosting the government's cost of default. Our key message is that, by shaping the direction of private capital flows, financial institutions determine whether financial integration improves or reduces government discipline. We explore the implications of this complementarity for financial liberalization and debt-financed bailouts of banks. We present some evidence consistent with complementarity.
Download InfoIf 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.
Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 124.
Length: 53 pages
Date of creation: 2009
Date of revision:
Sovereign Risk; Capital Flows; Institutions; Financial Liberalization; Sudden Stops;
Find related papers by JEL classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Aitor Erce, 2012. "Selective sovereign defaults," Globalization and Monetary Policy Institute Working Paper 127, Federal Reserve Bank of Dallas.
- Fernando A. Broner & Jaume Ventura, 2010.
"Rethinking the Effects of Financial Liberalization,"
NBER Working Papers
16640, National Bureau of Economic Research, Inc.
- Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
- Fernando Broner & Jaume Ventura, 2010. "Rethinking the effects of financial liberalization," Economics Working Papers 1128, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2013.
- Fernando Broner & Jaume Ventura, 2010. "Rethinking the Effects of Financial Liberalization," Working Papers 509, Barcelona Graduate School of Economics.
- Broner, Fernando A & Ventura, Jaume, 2010. "Rethinking the Effects of Financial Liberalization," CEPR Discussion Papers 8171, C.E.P.R. Discussion Papers.
- Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.
- Aitor Erce Domiguez, 2010. "Debtor Discrimination During Sovereign Debt Restructurings," 2010 Meeting Papers 1324, Society for Economic Dynamics.
- Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giovanni Bert).
If references are entirely missing, you can add them using this form.