On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks

41 Pages Posted: 7 Jan 2021

See all articles by Matthew Greenwood‐Nimmo

Matthew Greenwood‐Nimmo

University of Melbourne - Department of Economics

Viet Hoang Nguyen

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: November 10, 2020

Abstract

We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers, because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate substantial spillovers onto the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific financial sector bailout programmes.

Keywords: Financial sector bailouts; sovereign risk shocks; international spillovers; structural shocks; sign restrictions

JEL Classification: C58, E61, F42, GOl

Suggested Citation

Greenwood‐Nimmo, Matthew and Nguyen, Viet Hoang and Wu, Eliza, On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks (November 10, 2020). Melbourne Institute Working Paper No. 22/20, Available at SSRN: https://ssrn.com/abstract=3760930 or http://dx.doi.org/10.2139/ssrn.3760930

Matthew Greenwood‐Nimmo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Viet Hoang Nguyen

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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