Sovereign Risk, Financial Fragility and Debt Maturity

Dallal Bendjellal ()
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Dallal Bendjellal: Aix Marseille Univ, CNRS, AMSE, Marseille, France.

No 2222, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper studies the transmission of a sovereign debt crisis in which a shift in default risk generates a recession and gives rise to a doom loop between sovereign distress and bank fragility with important amplification effects. The model is used to investigate the macroeconomic and welfare effects of altering debt maturity during the crisis. Short-term maturities alleviate the bankers' losses on long-term bonds and moderate the recession at the cost of higher levels of debt in the future. In contrast, long-term maturities are more effective to reduce the households' welfare losses as they lower default risk and distortionary taxes.

Keywords: debt crisis; sovereign default risk; financial fragility; maturity dynamics (search for similar items in EconPapers)
JEL-codes: E44 E62 H12 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2022-09
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:2222

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