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http://ssrn.com/abstract=1364863
 
 

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Institutions, Public Debt and Foreign Finance


Nicola Gennaioli


Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Alberto Martin


Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Stefano Rossi


Krannert School of Management; Centre for Economic Policy Research (CEPR)

August 1, 2009

AFA 2010 Atlanta Meetings Paper

Abstract:     
We study the role of domestic financial institutions in sustaining capital flows to the private and public sector of a country whose government can default on its debt. As in recent public debt crises, in our model public defaults weaken banks’ balance sheets, disrupting domestic financial markets. This effect leads to a novel complementarity between private capital inflows and public borrowing, where the former sustain the latter by boosting the government’s cost of default. Our key message is that, by shaping the direction of private capital flows, financial institutions determine whether financial integration improves or reduces government discipline. We explore the implications of this complementarity for financial liberalization and debt-financed bailouts of banks. We present some evidence consistent with complementarity.

Number of Pages in PDF File: 52

Keywords: Sovereign Risk, Capital Flows, Institutions, Financial Liberalization, Sudden Stops

JEL Classification: F34, F36, G15, H63

working papers series


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Date posted: March 20, 2009 ; Last revised: March 15, 2012

Suggested Citation

Gennaioli, Nicola and Martin, Alberto and Rossi, Stefano, Institutions, Public Debt and Foreign Finance (August 1, 2009). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1364863 or http://dx.doi.org/10.2139/ssrn.1364863

Contact Information

Nicola Gennaioli
Bocconi University - Department of Finance ( email )
Via Roentgen 1
Milano, MI 20136
Italy
Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )
Via Roentgen 1
Milan, 20136
Italy
Alberto Martin
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )
Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Stefano Rossi (Contact Author)
Krannert School of Management ( email )
West Lafayette, IN 47907-1310
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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