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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The Political Origin of Home Bias: The Case of Europe
We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.
Cite this item
Filippo De Marco & Marco Macchiavelli, The Political Origin of Home Bias: The Case of Europe, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-060, 08 Jul 2016.
- G01 - Financial Economics - - General - - - Financial Crises
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
Keywords: Banks-sovereign nexus ; Home bias ; Government-owned banks ; Banks' recapitalization ; Board of directors
This item with handle RePEc:fip:fedgfe:2016-60
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