The pass-through of sovereign risk

• Localización: Journal of Political Economy, ISSN-e 1537-534X, Vol. 124, Nº. 4, 2016, págs. 879-926
• Idioma: inglés
• Texto completo no disponible (Saber más ...)
• Resumen

  • 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.