The Pass-Through of Sovereign Risk

Luigi Bocola

Journal of Political Economy, 2016, vol. 124, issue 4, 879 - 926

Abstract: This paper examines the macroeconomic implications of sovereign risk in a model in which banks hold domestic government debt. News of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their resources to finance firms (liquidity channel). Second, it generates a precautionary motive to deleverage (risk channel). I estimate the model using Italian data, finding that sovereign risk was recessionary and that the risk channel was sizable. I also use the model to measure the effects of subsidized long-term loans to banks. Precautionary motives at the height of the crisis imply that bank lending to firms responds little to these interventions.

Date: 2016
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Citations: View citations in EconPapers (251)

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Related works:
Working Paper: The Pass-Through of Sovereign Risk (2015)
Working Paper: The Pass-Through of Sovereign Risk (2014)
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