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On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks

Author

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  • Matthew Greenwood-Nimmo

    (Department of Economics, The University of Melbourne; Centre for Applied Macroeconomic Analysis, Australian National University)

  • Viet Hoang Nguyen

    (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne)

  • Eliza Wu

    (University of Sydney Business School; Centre for Applied Macroeconomic Analysis, Australian National University)

Abstract

We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers, because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate substantial spillovers onto the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific financial sector bailout programmes.

Suggested Citation

  • Matthew Greenwood-Nimmo & Viet Hoang Nguyen & Eliza Wu, 2020. "On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks," Melbourne Institute Working Paper Series wp2020n22, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2020n22
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    More about this item

    Keywords

    Financial sector bailouts; sovereign risk shocks; international spillovers; structural shocks; sign restrictions;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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