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Institutions, Public Debt and Foreign Finance

Author

Listed:
  • Nicola Gennaioli
  • Alberto Martin
  • Stefano Rossi

Abstract

We study the role of domestic financial institutions in sustaining capital flows to the private and public sector of a country whose government can default on its debt. As in recent public debt crises, in our model public defaults weaken banks' balance sheets, disrupting domestic financial markets. This effect leads to a novel complementarity between private capital inflows and public borrowing, where the former sustain the latter by boosting the government's cost of default. Our key message is that, by shaping the direction of private capital flows, financial institutions determine whether financial integration improves or reduces government discipline. We explore the implications of this complementarity for financial liberalization and debt-financed bailouts of banks. We present some evidence consistent with complementarity.

Suggested Citation

  • Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2009. "Institutions, Public Debt and Foreign Finance," Carlo Alberto Notebooks 124, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:124
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    File URL: https://www.carloalberto.org/wp-content/uploads/2018/11/no.124.pdf
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    Citations

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    Cited by:

    1. Aitor Erce, 2012. "Selective sovereign defaults," Globalization Institute Working Papers 127, Federal Reserve Bank of Dallas.
    2. Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
    3. Lizarazo, Sandra Valentina, 2013. "Default risk and risk averse international investors," Journal of International Economics, Elsevier, vol. 89(2), pages 317-330.
    4. Frantisek Hajnovic & Juraj Zeman, 2012. "Fiscal Space in the Euro zone," Working and Discussion Papers WP 5/2012, Research Department, National Bank of Slovakia.
    5. Duy‐Tung Bui, 2018. "How Financial Freedom and Integration Change Public Debt Impact on Financial Development in the Asia‐Pacific: A Panel Smooth Transition Regression Approach," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 486-501, December.
    6. Aitor Erce Domiguez, 2010. "Debtor Discrimination During Sovereign Debt Restructurings," 2010 Meeting Papers 1324, Society for Economic Dynamics.
    7. Brutti, Filippo, 2011. "Sovereign defaults and liquidity crises," Journal of International Economics, Elsevier, vol. 84(1), pages 65-72, May.

    More about this item

    Keywords

    Sovereign Risk; Capital Flows; Institutions; Financial Liberalization; Sudden Stops;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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