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and banking insolvency. This paper provides a theory of the feedback loop that allows for both domestic bailouts of the … banking system and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has …
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We provide a model that unifies the notion of self-fulfilling banking crises and sovereign debt crises. In this model, a bank run can be contagious by triggering a sovereign default, and vice versa. A deposit insurance scheme can eliminate the adverse equilibrium only if the government can repay...
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