IMF paper models sovereign and bank feedback loops

IMF headquarters in Washington DC

A working paper, published by the International Monetary Fund in July, analyses the feedback loops that exist between sovereign and bank solvency, arguing that this interdependence can create a self-fulfilling crisis.

The author, Gustavo Adler, develops a model to show that when banks hold government debt in an amount above a certain threshold, the economy becomes vulnerable to market expectations. This, the author says, follows from the fact that fiscal solvency depends on the strength of the

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