Domestic Banking Fragility and Sovereign Debt Capacity

I propose a unified model of domestic bank runs, sovereign debt issuance and international reserve accumulation. Banking fragility gives rise to endogenous costs of default that support sovereign debt capacity. It additionally brings about a financial stabilization role for international reserves, which allows reserves to complement debt capacity. The model generates realistic levels of debt and reserves in equilibrium, ties the likelihood of domestic banking crises to the government's debt and reserve policies, and generates endogenous disaster risk in the process