Domestic Banking Fragility and Sovereign Debt Capacity

64 Pages Posted: 20 Jul 2017 Last revised: 15 Sep 2017

See all articles by Yu Xu

Yu Xu

The University of Hong Kong - Faculty of Business and Economics

Date Written: September 14, 2017

Abstract

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

Xu, Yu, Domestic Banking Fragility and Sovereign Debt Capacity (September 14, 2017). Available at SSRN: https://ssrn.com/abstract=3002656 or http://dx.doi.org/10.2139/ssrn.3002656

Yu Xu (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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