On the effects of sovereign debt volatility: a theoretical model

Fernandez, Óscar; Fonseca, Sergio; Magnini, Gino; Marcelli Fabiani, Riccardo; Nobile, Claudia

On the effects of sovereign debt volatility: a theoretical model

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Fernandez, Ó, Fonseca, S, Magnini, G, Marcelli Fabiani, R, Nobile, C. On the effects of sovereign debt volatility: a theoretical model. 2021. handle: http://hdl.handle.net/10230/49164

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Abstract

We construct a theoretical Overlapping Generations (OLG) model to describe how sovereign debt crises can propagate in the economy under certain financial constraints. When prices of bonds fall due to perceived sovereign debt risks, banks can invest less on capital goods, directly affecting the business cycle. We find that a sovereign debt crisis affects young and old generations differently, with the latter facing higher fluctuations in consumption. We also find that the macroprudential policy can be effective only at very high levels on the old, but ineffective for the younger generation.