Liquidity, government bonds and sovereign debt crises

Molteni, Francesco

Liquidity, government bonds and sovereign debt crises

Llicència

Citació

Molteni, F. Liquidity, government bonds and sovereign debt crises. 2017. handle: http://hdl.handle.net/10230/33428

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Resum

This paper analyzes the Eurozone financial crisis through the lens of sovereign bond liquidity. Using novel data, I show that 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 macroeconomic variables in a general equilibrium model with financial frictions calibrated for Ireland. The model confirms the rise in the required returns of illiquid government bonds and predicts a substantial drop in economic activity and deflation. Unconventional policy alleviates the effect of the liquidity shock.