GOVERNMENT DEBT AND BANKING FRAGILITY: THE SPREADING OF STRATEGIC UNCERTAINTY

• 成果类型: Article
• 署名作者: Cooper, Russell; Nikolov, Kalin
• 署名单位: Pennsylvania Commonwealth System of Higher Education (PCSHE); Pennsylvania State University; Pennsylvania State University - University Park; European Central Bank
• 刊物名称: INTERNATIONAL ECONOMIC REVIEW
• ISSN/ISSBN: 0020-6598
• DOI: 10.1111/iere.12323
• 发表日期: 2018
• 页码: 1905-1925
• 关键词: Sovereign default risk; runs

摘要

This article studies the interaction of government debt and financial markets. This interaction, termed a diabolic loop, is driven by government choice to bail out banks and the resulting incentives for banks to hold government debt instead of self-insure through equity buffers. We highlight the role of bank equity issuance in determining whether the diabolic loop is a Nash equilibrium of the interaction between banks and the government. When equity is issued, no diabolic loop exists. In equilibrium, banks' rational expectations of a bailout ensure that no equity is issued and the sovereign-bank loop is operative.