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Sovereign Default and Domestic Banking

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Author Info

  • Igor Livshits

    ()
    (Department of Economics)

Abstract

Several recent defaults on sovereign debt were accompanied by major banking crises in the defaulting countries. I argue that the banking crises, triggered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. I use a simple model of prudential regulation to illustrate this point. I further investigate whether these “inadequate regulations†can be part of a constrained optimal arrangement which increases the cost of default and permits the government to borrow more ex-ante

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 453.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:453

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Keywords: Sovereign default; banking; prudential regulation;

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