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Banks, Sovereign Debt, and the International Transmission of Business Cycles

In: NBER International Seminar on Macroeconomics 2012

  • Luca Guerrieri
  • Matteo Iacoviello
  • Raoul Minetti

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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This chapter was published in:
  • Francesco Giavazzi & Kenneth D. West, 2013. "NBER International Seminar on Macroeconomics 2012," NBER Books, National Bureau of Economic Research, Inc, number giav12-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12786.
    Handle: RePEc:nbr:nberch:12786
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