Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis

Author/Editor:

Gustavo Adler

Publication Date:

July 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.

Series:

Working Paper No. 12/178

Subject:

English

Publication Date:

July 1, 2012

ISBN/ISSN:

9781475505269/1018-5941

Stock No:

WPIEA2012178

Format:

Paper

Pages:

29

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