The Impact of Sovereign Shocks
52 Pages Posted: 17 Nov 2014 Last revised: 26 Jan 2018
Date Written: January 1, 2018
We study the dynamic propagation mechanisms of systemic risk shocks within and across macro-systems of governments and financial institutions. We propose a novel approach to identify relevant systemic shocks and to classify them into sovereign or banking categories. We find that sovereign shocks have a significant and persistent impact on the probability of a collective banking default. We also explore channels through which these shocks propagate, and find that countries' fiscal fragility as well as banking exposure to these countries are relevant mechanisms of shock transmission.
Keywords: Systemic Risk, Contagion Risk, Banking Risk, Sovereign Risk, Fiscal Fragility, Narrative Approach
JEL Classification: E44, E50, G21, G28
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