Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279183 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10434
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper investigates the impact of banking prudential regulation on sovereign risk. We show that prudential regulation reduces sovereign risk and induces governments to spend more. As a result, countries with tight prudential regulation have lower primary budget balances and accumulate more government debt over time. We find that prudential regulation reduces private debt, while paradoxically increasing government debt. We explore several explanations for this paradox. Our results suggest that prudential regulation enables governments to accumulate debt because they improve the nation's credit rating and its borrowing conditions in sovereign bond markets.
Subjects: 
banking regulation
fiscal policy
macroprudential policy
sovereign debt
sovereign risk
JEL: 
E52
E58
E62
H30
G28
Document Type: 
Working Paper
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