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Increase in home bias in the Eurozone debt crisis: the role of domestic shocks

Listed author(s):
  • Camille Cornand

    ()

    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

  • Pauline Gandré

    ()

    (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)

  • Céline Gimet

    ()

    (, Institute of Political Studies, CHERPA, EA 4261, Aix-en-Provence, France and GATE Lyon Saint-Etienne, Ecully, F-69130, France)

One of the most striking consequences of the recent episode of sovereign debt market stress in the Eurozone has been the increase in the share of public debt held by the domestic sector in fragile economies. First, we identify the shocks that explain most of the variation in this share in an S-VAR model on a sample of 7 Eurozone countries between 2007 and 2012. Home bias in sovereign debt responds positively to fundamentals and expectations shocks but we find no evidence that the increase in home bias is destabilizing per se. Second, we theoretically model the impact of the previous shocks in a second-generation model of crisis with endogenous home bias in sovereign debt. We derive conditions under which a higher home bias is associated with a change in the government’s decision. Finally, we discuss which case of the model best applies to the distinct countries in our sample during the recent sovereign debt crisis in the Eurozone.

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Paper provided by Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon in its series Working Papers with number 1419.

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Date of creation: 2014
Handle: RePEc:gat:wpaper:1419
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