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The Sovereign-Bank Interaction in the Eurozone Crisis

Author

Listed:
  • Maximilian Goedl

    (University of Graz, Austria)

Abstract
This paper investigates the relationship between government debt default, the banking sector and the wider economy. It builds a model of the public bond market, the banking sector and the real economy to study the mechanism by which a government default affects the other sectors and shows that this model can explain some "stylized facts" of the Eurozone crisis. The key aspect of the model is a friction in the financial market which forces banks to hold part of their assets in the form of government bonds. In such a model, an exogenous increase in the probability of default can lead to the joint occurrence of a credit crunch (i.e. declining bank lending and rising spreads between loan interest rates and deposit rates) and a decline in output. The paper also shows that an adverse technology shock (an exogenous decline in total factor productivity) cannot fully explain these phenomena.

Suggested Citation

  • Maximilian Goedl, 2017. "The Sovereign-Bank Interaction in the Eurozone Crisis," Graz Economics Papers 2017-10, University of Graz, Department of Economics.
    • Handle: RePEc:grz:wpaper:2017-10
    as

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    File URL: https://unipub.uni-graz.at/obvugrveroeff/download/pdf/9565063?originalFilename=true
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    References listed on IDEAS

    as
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    4. De Bruyckere, Valerie & Gerhardt, Maria & Schepens, Glenn & Vander Vennet, Rudi, 2013. "Bank/sovereign risk spillovers in the European debt crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4793-4809.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Government default; Financial frictions; Business cycle model;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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