Sovereign Spread Volatility and Banking Sector

Vivek Sharma () and Edgar Silgado-Gómez ()
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Vivek Sharma: LUISS Guido Carli, Department of Economics and Finance
Edgar Silgado-Gómez: University of Rome "Tor Vergata" & European Central Bank, http://www.ceistorvergata.it

No 454, CEIS Research Paper from Tor Vergata University, CEIS

Abstract: Using structural vector autoregression augmented with stochastic volatility (SVAR-SV), we document that in late 2000s there were large spikes in volatility of spreads on peripheral eurozone government bonds. This increased volatility entailed a significant decline in bank credit to nonfinancial sector and real economic activity. We rationalize these results in a New Keynesian dynamic stochastic general equilibrium (DSGE) model with financial intermediation. In our framework, a rise in spread volatility erodes banks’ net worth and constrains their balance sheets. The banks respond by slashing their lending to real sector, dampening the economy as a whole. Results from the model match our empirical findings.

Keywords: Sovereign Spread Volatility; Banks; SVAR-SV; NK-DSGE (search for similar items in EconPapers)
JEL-codes: E32 E44 F30 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-03-08, Revised 2019-03-08
New Economics Papers: this item is included in nep-ban, nep-dge, nep-eec, nep-ets and nep-mac
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