Paolo Varraso | Tor Vergata
Sovereign Debt, Domestic Banks and the Provision of Public Liquidity
Wednesday, April 8, 2026 h. 13:00-14:00
Sala del Consiglio
Abstract:
This paper develops a model to study how a default can affect the
domestic economy and the government’s ability to provide liquidity.
Banks that do not have good investment opportunities invest in public
debt. After a default the government’s ability to credibly issue debt
is undermined. A scarcer supply of public debt makes banks substitute
away from government securities to investments in their less
productive projects. A quantitative analysis of the model for
Argentina can generate a deep and persistent fall in output
post-default, which induces repayment incentives to sustain
significant levels of external public debt. We provide empirical
support for the model’s mechanism and use the model to analyze
different policies that regulate banks’ holdings of public debt.

