NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops

Emmanuel Farhi, Jean Tirole

NBER Working Paper No. 21843
Issued in January 2016, Revised in November 2016
NBER Program(s):EFG, IFM, ME, PE

The recent unravelling of the Eurozone's financial integration raised concerns about feedback loops between sovereign 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 important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.

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Document Object Identifier (DOI): 10.3386/w21843

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