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Sovereign defaults and banking crises

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  • Sosa-Padilla, César

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%.

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  • Sosa-Padilla, César, 2018. "Sovereign defaults and banking crises," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 88-105.
    • Handle: RePEc:eee:moneco:v:99:y:2018:i:c:p:88-105
    DOI: 10.1016/j.jmoneco.2018.07.004
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    More about this item

    Keywords

    Sovereign default; Banking crisis; Credit crunch; Endogenous cost of default; Bank exposure to sovereign debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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