Sovereigns at risk: A dynamic model of sovereign debt and banking leverage

• 成果类型: Article; Proceedings Paper
• 署名作者: Coimbra, Nuno
• 署名单位: Paris School of Economics
• 刊物名称: JOURNAL OF INTERNATIONAL ECONOMICS
• ISSN/ISSBN: 0022-1996
• DOI: 10.1016/j.jinteco.2020.103298
• 发表日期: 2020
• 关键词: Banking; asset pricing; sovereign default; Fiscal limits

摘要

This paper develops a dynamic model with heterogeneous investors and sovereign default to analyze the dynamic link between banking sector capitalization and sovereign bond yields. The banking sector is modelled as operating under a Value-at-Risk (VaR) constraint, which can bind occasionally. As default risk rises, the constraint may bind, generating a fall in demand for sovereign bonds that can be accompanied by a rise in the risk premium if other agents are more risk averse. In turn, the rise in risk premium leads to a feedback effect through debt accumulation dynamics and the probability of government default. (C) 2020 The Author. Published by Elsevier B.V.