Sovereign credit risk and global macroeconomic forces
The ongoing apparently contagious public or sovereign debt crisis in Europe represents the third phase of the financial crisis since it really gained momentum after the collapse of Lehman Brothers in 2008. The notion that an initial financial collapse, either in the form of a balance of payments or banking crisis, or both, is followed by a severe economic recession which, in turn, is generally followed by a public debt crisis is fairly robust and can be backed by empirical evidence from relevant crisis periods. However, given the importance of the implied sovereign credit risk in financial markets, surprisingly little systematic research has been done on the potential common sources of global macroeconomic risks that drive sovereign credit.
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Limited asset-market participation, sticky wages and prices, and the nature of optimal monetary policy
Many of the modern New Keynesian dynamic macro models of the stochastic general equilibrium variety build on the assumption that household (and other relevant dynamic decision-makers in those models) have full and unrestricted access to (well-functioning) financial markets. Access to financial markets helps households smooth their consumption over time and states of the economy, thus contributing to the lifetime welfare of said households, who are generally assumed to be risk averse and hence seek to avoid (excess) fluctuations in their consumption.
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More capital hampers bank’s liquidity creation?
The theory of financial intermediation suggests that – in addition to their role in risk transformation – banks also fulfil a function in liquidity creation. Despite this theoretical background and policy interest, however, liquidity creation by banks was not studied empirically until Berger and Bouwman (2009). They developed comprehensive measures of bank liquidity creation, introducing four different measures that take into account alternative classifications of loans and also off-balance-sheet items.
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