Information flow in times of crisis

The case of the European banking and sovereign sectors

Mardi Dungey, Stan Hurn, Shuping Shi*, Vladimir Volkov

*Corresponding author for this work

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Abstract

Crises in the banking and sovereign debt sectors give rise to heightened financial fragility. Of particular concern is the development of self-fulfilling feedback loops where crisis conditions in one sector are transmitted to the other sector and back again. We use time-varying tests of Granger causality to demonstrate how empirical evidence of connectivity between the banking and sovereign sectors can be detected, and provide an application to the Greek, Irish, Italian, Portuguese and Spanish (GIIPS) countries and Germany over the period 2007 to 2016. While the results provide evidence of domestic feedback loops, the most important finding is that financial fragility is an international problem and cannot be dealt with purely on a country-by-country basis.

Original languageEnglish
Article number5
Pages (from-to)1-20
Number of pages20
JournalEconometrics
Volume7
Issue number1
DOIs
Publication statusPublished - 1 Mar 2019

Bibliographical note

Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

  • Banking
  • Diabolical loop
  • Financial crises
  • Sovereign debt

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