Area Sovereign Debt Crisis Research Articles

Forecasting in turbulent times

AbstractSince the beginning of this century, the global economy has been hit by a series of unforeseen shocks, including the Global Financial Crisis, the euro area's sovereign debt crisis, and most recently, the global inflation surge. To motivate this special issue, we provide a brief overview of recent methods that have been proposed to improve the ability of forecast models to predict shocks and to capture their effects once they have occurred. We also propose a method that may allow central banks to respond more quickly to the kind of inflationary surge that occurred from 2020 to 2022 so that those banks would not have misdiagnosed the surge as a temporary phenomenon.

Asset purchase bailouts and endogenous implicit guarantees

This paper provides a theory of endogenous implicit guarantees on risky assets, in which a government’s bailouts take the form of asset purchases to alleviate asymmetric information on private liquidity needs. As a result of asymmetric information, direct transfers to agents are imperfect so that, when more constrained agents are also more exposed to a given asset, asset purchases by the government are optimal. When anticipated, this form of bailouts leads to an endogenous implicit guarantee premium so that otherwise risky assets can be traded as if there are risk-free. This possibility of implicit guarantee is amplified by other financial frictions such as risk-shifting. Finally, I show how this form of bailouts can shed light on the buildup of the euro area's sovereign debt crisis.

The political economy of the euro area's sovereign debt crisis: introduction to the special issue of the Review of International Political Economy

ABSTRACTThis special issue has two main aims: to examine the contribution of political economy analyses of the sovereign debt crisis and to relate these findings to longstanding debates in the sub-disciplines of comparative political economy, international political economy and European economic governance. This introduction begins by reviewing the comparative political economy literature on national financial systems in order to account for the playing out of the crisis. It then examines the international political economy literature on the International Monetary Fund (IMF) and financial (sovereign debt) markets that played such a key role in the unfolding of the sovereign debt crisis. Finally, it outlines longstanding academic debates on the main 'asymmetries’; in European economic governance, and provides a critical overview of the three main policy and institutional reforms adopted by European Union governments in response to the crisis.

The Italian Banking System: Banca Monte dei Paschi's Scandal and the Euro Area's Sovereign Debt Crisis

The financial woes experienced by the Monte dei Paschi di Siena (MPS) and by a handful of other Italian banks in which foundations have played a prominent role offer an opportunity to reflect on three interrelated topics. The first issue is the evolution of the Italian banking system and banking legislation over the past decades to explain the rather distinctive governance structure of these banks. The second issue is the unfolding of the sovereign debt crisis in the euro area, which set the broader context in which the MPS scandal and the subsequent financial troubles of other banks took place. The third issue is the main response of the European Union and euro area to the sovereign debt crisis, namely, the proposal to create an EU banking union, which in turn triggered strong supervisory actions by the Bank of Italy in preparation for the handover of banking supervision to the European Central Bank.