Sovereign Default Risk and Bank Fragility in Financially Integrated Economies / Patrick Bolton, Olivier Jeanne.

Format:

Book

Author/Creator:

Bolton, Patrick.

Contributor:

National Bureau of Economic Research.

Jeanne, Olivier.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16899.

NBER working paper series no. w16899

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

We analyze contagious sovereign debt crises in financially integrated economies. Under financial integration banks optimally diversify their holdings of sovereign debt in an effort to minimize the costs with respect to an individual country's sovereign debt default. While diversification generates risk diversification benefits ex ante, it also generates contagion ex post. We show that financial integration without fiscal integration results in an inefficient equilibrium supply of government debt. The safest governments inefficiently restrict the amount of high quality debt that could be used as collateral in the financial system and the riskiest governments issue too much debt, as they do not take account of the costs of contagion. Those inefficiencies can be removed by various forms of fiscal integration, but fiscal integration typically reduce the welfare of the country that provides the "safe-haven" asset below the autarky level.

Notes:

Print version record

March 2011.