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Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention

Author

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  • Jing Cheng

    (Université de Strasbourg (BETA), CNRS)

  • Meixing Dai

    (Université de Strasbourg (BETA), CNRS)

  • Frédéric Dufourt

    (Aix-Marseille UniversitÈ (Aix-Marseille School of Economics), CNRS-GREQAM & EHESS and Institut Universitaire de France)

Abstract

We analyze the conditions of emergence of a twin banking and sovereign debt crisis within a monetary union in which: (i) the central bank is not allowed to provide direct financial support to stressed member states or to play the role of lender of last resort in sovereign bond markets, and (ii) the responsibility of fighting against large scale bank runs, ascribed to domestic governments, is ensured through the implementation of a financial safety net (banking regulation and government deposit guarantee). We show that this broad institutional architecture, typical of the Eurozone at the onset of the financial crisis, is not always able to prevent the occurrence of a twin banking and sovereign debt crisis triggered by pessimistic investors' expectations. Without significant backstop by the central bank, the financial safety net may actually aggravate, instead of improve, the financial situation of banks and of the government.

Suggested Citation

  • Jing Cheng & Meixing Dai & Frédéric Dufourt, 2014. "Banking and Sovereign Debt Crises in a Monetary Union Without Central Bank Intervention," AMSE Working Papers 1428, Aix-Marseille School of Economics, France, revised Jun 2014.
    • Handle: RePEc:aim:wpaimx:1428
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    2. Meier, Samira & Rodriguez Gonzalez, Miguel & Kunze, Frederik, 2021. "The global financial crisis, the EMU sovereign debt crisis and international financial regulation: lessons from a systematic literature review," International Review of Law and Economics, Elsevier, vol. 65(C).
    3. Gabriel Cuadra & Manuel Ramos-Francia & Santiago Garcia-Verdu, 2018. "On the role of financial aid in a default episode," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 27(1), pages 1-19, December.
    4. Boucekkine, Raouf & Kazuo, Nishimura & Venditti, Alain, 2017. "Introduction to international financial markets and banking systems crises," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 87-91.
    5. Lim, Jamus Jerome, 2019. "Growth in the shadow of debt," Journal of Banking & Finance, Elsevier, vol. 103(C), pages 98-112.
    6. Ahmet Kara, 2023. "Stabilizing instability‐suboptimality‐and‐chaos‐prone fluctuations at crisis junctures: Stochastic possibilities for crisis management," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1772-1786, April.
    7. Jin Cheng & Meixing Dai & Frédéric Dufourt, 2015. "The banking crisis with interbank market freeze," Working Papers of BETA 2015-20, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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    More about this item

    Keywords

    banking crisis; sovereign debt crisis; bank runs; financial safety net; liquidity regulation; government deposit guarantee; self-fulfilling propheties;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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