The pass-through of sovereign risk

Luigi Bocola*

*Corresponding author for this work

Research output: Contribution to journalArticle

65 Scopus citations

Abstract

This paper examines the macroeconomic implications of sovereign risk in a model in which banks hold domestic government debt. News of a future sovereign default hampers financial intermediation. First, it tightens the funding constraints of banks, reducing their resources to finance firms (liquidity channel). Second, it generates a precautionary motive to deleverage (risk channel). I estimate the model using Italian data, finding that sovereign risk was recessionary and that the risk channel was sizable. I also use the model to measure the effects of subsidized long-term loans to banks. Precautionary motives at the height of the crisis imply that bank lending to firms responds little to these interventions.

Original languageEnglish (US)
Pages (from-to)879-881
Number of pages3
JournalJournal of Political Economy
Volume124
Issue number4
StatePublished - Aug 1 2016

ASJC Scopus subject areas

  • Economics and Econometrics

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