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Financial Spillover and Contagion Risks in the Euro Area in 2007-2019

Roman Garcia, Dimitri Lorenzani, Daniel Monteiro, Francesco Perticari, Bořek Vašíček () and Lukas Vogel

No 137, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper analyses empirically the main direct and indirect transmission channels of financial spillovers and contagion risks in the euro area, focusing on the sovereign-to-sovereign, sovereign-to-bank, and bankto-bank channels. We employ correlation analysis, analysis of bank balance sheets, reduced-form models inferring the interconnectedness among agents from market data, and simulated structural models. The value added by this paper to the literature consists both in analysing the recent episodes of financial distress (until 2019), which happened after reforms of the Economic and Monetary Union (EMU) architecture were introduced in response to the euro area debt crisis, and in our reliance on complementary analytical tools (“tool kit”). Overall, the paper suggests that: (i) sovereign-to-sovereign spillover risks have weakened, arguably also due to a more limited role of redenomination risk; (ii) financial spillovers from sovereigns to banks (and vice versa) have become smaller in recent years; and (iii) the bank-to-bank transmission channel remains the most relevant in terms of financial spillovers and potential contagion. Finally, when analysing the impact of financial spillovers on the real economy, we find that higher financial risks can imply sizeable losses in terms of real GDP growth.

JEL-codes: C01 E43 G01 G21 G28 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2021-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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