Sovereign risk, interbank freezes, and aggregate fluctuations
Philipp Engler and
Christoph Grosse Steffen
European Economic Review, 2016, vol. 87, issue C, 34-61
This paper shows how spillovers from sovereign risk to banks׳ access to wholesale funding establish a bank-sovereign nexus. In a dynamic stochastic general equilibrium set-up, heterogeneous banks give rise to an interbank market where government bonds are used as collateral. Government borrowing under limited commitment is costly ex ante as bank funding conditions tighten when the quality of collateral drops. These spillovers, by impeding interbank intermediation, lower the penalty from defaulting due to an interbank freeze during a recession and propagate aggregate shocks to the macroeconomy. The model is calibrated using Greek data and is capable of reproducing stylized facts from the European sovereign debt crisis. In an application, we show that the ECB׳s non-standard financing operations mitigate the adverse feedback mechanism.
Keywords: Sovereign default; Bank-sovereign link; Interbank market; Domestic debt; Credit policies (search for similar items in EconPapers)
JEL-codes: E43 E44 F34 H63 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Sovereign risk, interbank freezes, and aggregate fluctuations (2015)
Working Paper: Sovereign Risk, Interbank Freezes, and Aggregate Fluctuations (2014)
Working Paper: Sovereign risk, interbank freezes, and aggregate fluctuations (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:87:y:2016:i:c:p:34-61
Access Statistics for this article
European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer
More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Nithya Sathishkumar ().