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Is Banks’ Home Bias Good or Bad for Public Debt Sustainability?

Said Bakhache, Heiko Hesse and Tamon Asonuma ()

No 2015/044, IMF Working Papers from International Monetary Fund

Abstract: Motivated by the recent increase in domestic banks’ holdings of domestic sovereign debt (i.e., home bias) in the European periphery, this paper analyzes implications of banks’ home bias for the sovereign’s debt sustainability. The main findings, based on a sample of advanced (AM) and emerging market (EM) economies, suggest that home bias generally reduces the cost of borrowing for AMs and EMs when debt levels are moderate to high. A worsening of market sentiments appears to dimish the favorable impact of home bias on cost of borrowing particularly for EMs. In addition, for AMs and EMs, higher home bias is associated with higher debt levels, and less responsive fiscal policy. The findings suggest that home bias indeed matters for debt sustainability: Home bias may provide fiscal breathing space, but delays in fiscal consolidation may actually delay problems until debt reaches dangerously high levels.

Keywords: WP; debt; debt difficulties; debt difficulty; Banks; Home Bias; Government Bond Yields; Debt Sustainability; Primary Balance; Sovereign-bank Nexus; debt distress; debt term; debt sustainability concerns arise; debt issuance; debt level; debt distress events; investor diversification effect; debt accumulation; sales of nonresident; Domestic debt; Yield curve; Fiscal stance; Bond yields; Global (search for similar items in EconPapers)
Pages: 37
Date: 2015-02-27
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Handle: RePEc:imf:imfwpa:2015/044