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Banks, sovereign debt and the international transmission of business cycles

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  • Luca Guerrieri
  • Matteo Iacoviello
  • Raoul Minetti

Abstract

This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1067.

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Date of creation: 2012
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Handle: RePEc:fip:fedgif:1067

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. L’Unione bancaria europea, strumento di stabilita’ e di crescita
    by Raoul Minetti in iMille on 2014-02-25 10:10:31
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Cited by:
  1. Christopher M. Gunn & Alok Johri, 2013. "Fear of Sovereign Default, Banks, and Expectations-driven Business Cycles," Department of Economics Working Papers 2013-08, McMaster University.

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