Working Paper: NBER ID: w18303
Authors: Luca Guerrieri; Matteo Iacoviello; Raoul Minetti
Abstract: This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.
Keywords: Sovereign debt; International business cycles; Credit supply; Banking sector
JEL Codes: F4; G21; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contractionary shocks in the periphery (F41) | sovereign default (F34) |
| sovereign default (F34) | wealth transfer from banks and households to the government (H69) |
| sovereign default (F34) | output in both the core and periphery (R15) |
| sovereign default (F34) | erosion of bank capitalization (F65) |
| erosion of bank capitalization (F65) | constrained loan supply (E51) |
| constrained loan supply (E51) | reduced investment and output (E22) |
| sovereign default (F34) | reduced government access to credit markets (H81) |
| reduced government access to credit markets (H81) | varying impacts on output in the core and periphery (F69) |
| partial default on periphery sovereign debt (F65) | significant declines in GDP in both regions (F69) |
| sovereign default shocks (F65) | negative spillover effects on output in both regions (F69) |
| sovereign default (F34) | decline in economic activity in the core (F44) |