Banks, Sovereign Debt and the International Transmission of Business Cycles

38 Pages Posted: 30 May 2017

See all articles by Luca Guerrieri

Luca Guerrieri

Federal Reserve Board - Trade and Financial Studies

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Raoul Minetti

Michigan State University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 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 M. and Minetti, Raoul, Banks, Sovereign Debt and the International Transmission of Business Cycles (2012). FRB International Finance Discussion Paper No. 1067. Available at SSRN: https://ssrn.com/abstract=2976760

Luca Guerrieri (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2550 (Phone)

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Raoul Minetti

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-355-7349 (Phone)
517-432-1068 (Fax)

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