Banks, Sovereign Risk and Unconventional Monetary Policies
GATE Working Paper 1830, December 2018
32 Pages Posted: 20 Dec 2018
Date Written: June 2018
We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the core and the periphery of the Euro Area, the model gives rise to a debt-banks-credit loop that substantially amplifies the effects of financial shocks, especially for the periphery. We use the model to investigate the effects of a stylized public asset purchase program at the steady state and during a crisis. We find that it is more effective in stimulating the economy during a crisis, in particular for the periphery.
Keywords: Recession, Interbank Market, Sovereign Default Risk, Asset Purchases
JEL Classification: E32, E44, E58, F34
Suggested Citation: Suggested Citation