Sovereign Debt Crises and Financial Contagion: Estimating Effects in an Endogenous Network

Seth Richards-Shubik () and Brent Glover
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Brent Glover: Carnegie Mellon University

No 1176, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: In an integrated global financial system, a sovereign default raises concerns of financial contagion to other countries. We develop and estimate an equilibrium model featuring a network of international borrowing and lending. In the model, the network structure of borrowing-lending relationships arises endogenously and results in the propagation of financial shocks across countries. We estimate the model using data on foreign claims among a network of 20 countries over six years. Simulating counterfactual experiments from the estimated model, we find a non-trivial role for financial contagion. The default of a sovereign in the network has a noticeable effect on the borrowing costs and default probabilities of other network members.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1176

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