Sovereign Debt Crises and Financial Contagion: Estimating Effects in an Endogenous Network
In an integrated global financial system, a sovereign default raises concerns of financial contagion to other countries. We develop and estimate an equilibrium model featuring a network of international borrowing and lending. In the model, the network structure of borrowing-lending relationships arises endogenously and results in the propagation of financial shocks across countries. We estimate the model using data on foreign claims among a network of 20 countries over six years. Simulating counterfactual experiments from the estimated model, we find a non-trivial role for financial contagion. The default of a sovereign in the network has a noticeable effect on the borrowing costs and default probabilities of other network members.
Year of publication: |
2013
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Authors: | Richards-Shubik, Seth ; Glover, Brent |
Institutions: | Society for Economic Dynamics - SED |
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