Domestic Banking Fragility and Sovereign Debt Capacity
64 Pages Posted: 20 Jul 2017 Last revised: 15 Sep 2017
Date Written: September 14, 2017
I propose a unified model of domestic bank runs, sovereign debt issuance and international reserve accumulation. Banking fragility gives rise to endogenous costs of default that support sovereign debt capacity. It additionally brings about a financial stabilization role for international reserves, which allows reserves to complement debt capacity. The model generates realistic levels of debt and reserves in equilibrium, ties the likelihood of domestic banking crises to the government’s debt and reserve policies, and generates endogenous disaster risk in the process.
Keywords: Sovereign Debt, International Reserves, Bank Runs, Gobal Games
JEL Classification: F34, F41, G01, G21, H63
Suggested Citation: Suggested Citation