Sovereign Defaults and Banking Crises

Cesar Sosa-Padilla

MPRA Paper from University Library of Munich, Germany

Abstract: Episodes of sovereign default feature three key empirical regularities in connection with the banking systems of the countries where they occur: (i) sovereign defaults and banking crises tend to happen together, (ii) commercial banks have substantial holdings of government debt, and (iii) sovereign defaults result in major contractions in bank credit and production. This paper provides a rationale for these phenomena by extending the traditional sovereign default framework to incorporate bankers that lend to both the government and the corporate sector. When these bankers are highly exposed to government debt a default triggers a banking crisis which leads to a corporate credit collapse and subsequently to an output decline. When calibrated to Argentina's 2001 default episode the model produces default on equilibrium with a frequency in line with actual default frequencies, and when it happens credit experiences a sharp contraction which generates an output drop similar in magnitude to the one observed in the data. Moreover, the model also matches several moments of the cyclical dynamics of macroeconomic aggregates.

Keywords: Sovereign Default; Banking Crisis; Credit Crunch; Optimal Fiscal Policy; Markov Perfect Equilibrium; Endogenous Cost of Default; Domestic Debt (search for similar items in EconPapers)
JEL-codes: E62 F34 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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https://mpra.ub.uni-muenchen.de/41074/1/MPRA_paper_41074.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/81795/1/MPRA_paper_81795.pdf revised version (application/pdf)

Related works:
Journal Article: Sovereign defaults and banking crises (2018)
Working Paper: Sovereign Defaults and Banking Crises (2015)
Working Paper: Sovereign Defaults and Banking Crises (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:41074

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