Date: 2019
Type: Working Paper
Liquidity, government bonds and sovereign debt crises
Working Paper, EUI MWP, 2019/02
MOLTENI, Francesco, Liquidity, government bonds and sovereign debt crises, EUI MWP, 2019/02 - https://hdl.handle.net/1814/63248
Retrieved from Cadmus, EUI Research Repository
This paper analyzes the Eurozone financial crisis through the lens of sovereign bond liquidity. Using novel data, I show that following the emergence of sovereign risk, repo haircuts on peripheral government bonds sharply increased during the crisis, reducing their liquidity and amplifying the rise in their yields. I study the impact of this liquidity shock on asset prices and aggregate activity in a general equilibrium model with financial frictions. The model confirms the rise in the required returns of illiquid government bonds, predicts a substantial drop in economic activity and provides an additional mechanism for the transmission of sovereign risk.
Cadmus permanent link: https://hdl.handle.net/1814/63248
ISSN: 1830-7728
Series/Number: EUI MWP; 2019/02
Publisher: European University Institute
Keyword(s): Repo Haircuts Liquidity shock Funding constraint E44 E58 G12 G15 G23
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