Banks, Sovereign Debt and the International Transmission of Business Cycles

38 Pages Posted: 18 Aug 2012 Last revised: 4 Jan 2021

See all articles by Luca Guerrieri

Luca Guerrieri

Board of Governors of the Federal Reserve System

Matteo Iacoviello

Board of Governors of the Federal Reserve System

Raoul Minetti

Michigan State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2012

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.

Suggested Citation

Guerrieri, Luca and Iacoviello, Matteo and Minetti, Raoul, Banks, Sovereign Debt and the International Transmission of Business Cycles (August 2012). NBER Working Paper No. w18303, Available at SSRN: https://ssrn.com/abstract=2131675

Luca Guerrieri (Contact Author)

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Matteo Iacoviello

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Raoul Minetti

Michigan State University - Department of Economics ( email )

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