Domestic Banking Fragility and Sovereign Debt Capacity

59 Pages Posted: 20 Jul 2017 Last revised: 16 Aug 2022

See all articles by Yu Xu

Yu Xu

University of Delaware

Date Written: August 15, 2022


I quantitatively analyze the interaction between domestic bank runs and the sovereign’s debt, default, and international reserve policies. The model uses global game techniques to relate the unique domestic bank run outcome to the health of the sovereign’s external balance sheet. In equilibrium, the sovereign’s external balance sheet conditions determine its ability to prevent domestic bank runs. I find that domestic banking fragility gives rise to (1) endogenous costs of sovereign default, and (2) a financial stabilization role for international reserves. The model generates realistic levels of debt and reserves in equilibrium, and the interaction between sovereign defaults and domestic banking crises.

Keywords: Sovereign Debt, International Reserves, Bank Runs, Gobal Games

JEL Classification: F34, F41, G01, G21, H63

Suggested Citation

Xu, Yu, Domestic Banking Fragility and Sovereign Debt Capacity (August 15, 2022). Available at SSRN: or

Yu Xu (Contact Author)

University of Delaware ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

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