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Deadly Embrace - Sovereign and Financial Balance Sheets Doom Loops

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  • Emmanuel Farhi
  • Jean Tirole

Abstract

The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency. The paper provides a theory of the feed backloop that allows for both domestic bailouts of the banking system and sovereign debt forgiveness by international creditors or solidarity by other countries. The theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.

Suggested Citation

  • Emmanuel Farhi & Jean Tirole, 2017. "Deadly Embrace - Sovereign and Financial Balance Sheets Doom Loops," EconPol Working Paper 1, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econwp:_1
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    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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