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Sovereign defaults and banking crises

Cesar Sosa-Padilla ()

Journal of Monetary Economics, 2018, vol. 99, issue C, 88-105

Abstract: Sovereign defaults feature three key empirical regularities regarding the domestic banking systems: (i) defaults and banking crises happen together, (ii) banks are largely exposed to government debt, (iii) defaults trigger major contractions in bank credit and production. We rationalize these phenomena by extending a traditional default framework to incorporate bankers who lend to both government and firms. When bankers are exposed to government debt, a default generates a banking crisis, which triggers collapses in corporate credit and output. Calibrated to the 2001-02 Argentine default, the model produces equilibrium crises at observed frequencies, sharp credit contractions, and output drops of 7%.

Keywords: Sovereign default; Banking crisis; Credit crunch; Endogenous cost of default; Bank exposure to sovereign debt (search for similar items in EconPapers)
JEL-codes: F34 E62 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Sovereign Defaults and Banking Crises (2015) Downloads
Working Paper: Sovereign Defaults and Banking Crises (2014) Downloads
Working Paper: Sovereign Defaults and Banking Crises (2012) Downloads
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