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Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops

Listed author(s):
  • Farhi, Emmanuel
  • Tirole, Jean

The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 11024.

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Date of creation: Dec 2015
Handle: RePEc:cpr:ceprdp:11024
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