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Increase in home bias and sovereign debt crisis in the Eurozone

Author

Listed:
  • Camille Cornand

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Pauline Gandré

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Céline Gimet

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique, CHERPA - Croyance, Histoire, Espace, Régulation Politique et Administrative - AMU - Aix Marseille Université - Institut d'Études Politiques [IEP] - Aix-en-Provence)

Abstract

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.

Suggested Citation

  • Camille Cornand & Pauline Gandré & Céline Gimet, 2014. "Increase in home bias and sovereign debt crisis in the Eurozone," Post-Print halshs-01096235, HAL.
    • Handle: RePEc:hal:journl:halshs-01096235
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    Cited by:

    1. Blot, Christophe & Ducoudré, Bruno & Timbeau, Xavier, 2016. "Sovereign debt spread and default in a model with self-fulfilling prophecies and asymmetric information," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 281-299.
    2. Michel Aglietta & Xavier Ragot, 2015. "Érosion du tissu productif en France. Causes et remèdes," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(6), pages 95-150.
    3. repec:hal:spmain:info:hdl:2441/1fftm81rkt8t48jjlb9s9fh2g5 is not listed on IDEAS
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    5. repec:hal:spmain:info:hdl:2441/5bhbhfsmhj981b00go8c6saind is not listed on IDEAS

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