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Sovereign Default Risk and Credit Supply: Evidence from the Euro Area

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  • Olli Palm'en

Abstract

Did sovereign default risk affect macroeconomic activity through firms' access to credit during the European sovereign debt crisis? We investigate this question by a estimating a structural panel vector autoregressive model for Italy, Spain, Portugal, and Ireland, where the sovereign risk shock is identified using sign restrictions. The results suggest that decline in the creditworthiness of the sovereign contributed to a fall in private lending and economic activity in several euro-area countries by reducing the value of banks' assets and crowding out private lending.

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  • Olli Palm'en, 2020. "Sovereign Default Risk and Credit Supply: Evidence from the Euro Area," Papers 2006.03592, arXiv.org.
    • Handle: RePEc:arx:papers:2006.03592
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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