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Sovereign Defaults, Credit to the Private Sector, and Domestic Credit Market Institutions

Listed author(s):
  • GUIDO SANDLERIS

Sovereign defaults are associated with declines in foreign and domestic credit to the domestic private sector. This paper analyzes theoretically whether sovereign defaults can lead to this decline, even if domestic agents do not hold sovereign debt. It also studies whether the quality of domestic financial institutions affect the magnitude of this effect. In order to address these issues, the paper embeds the traditional sovereign borrower/foreign creditors relationship of the sovereign debt literature in a macromodel where widespread individual financial constraints limit a country's ability to reallocate resources. The paper finds that sovereign defaults can indeed generate a decline in foreign and domestic credit even if domestic agents do not hold sovereign debt, and that stronger domestic financial institutions can amplify this effect. These findings constitute a new step toward understanding the costs of sovereign defaults.

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File URL: http://hdl.handle.net/10.1111/jmcb.12108
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 46 (2014)
Issue (Month): 2-3 (March)
Pages: 321-345

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Handle: RePEc:wly:jmoncb:v:46:y:2014:i:2-3:p:321-345
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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