Anushka Chawla: anushka.chawla[at]univ-amu.fr
Laura Sénécal: laura.senecal[at]univ-amu.fr
Carolina Ulloa Suarez: carolina.ulloa-suarez[at]univ-amu.fr
This paper studies the transmission of a sovereign debt crisis in which a shift in sovereign default risk generates a recession and gives rise to a doom loop between sovereign distress and bank fragility with important amplification effects. The model is used to investigate the macroeconomic and welfare effects of altering the debt maturity structure during the crisis. My main finding is that shifting towards short-term maturities alleviates the bankers’ capital losses on long-term bonds and moderates the recession at the cost of higher levels of public debt in the future. In contrast, lengthening the maturity structure is more effective to reduce the households’ welfare losses as it reduces the rollover costs of debt, which results in a lower sovereign default risk and lower distortionary taxes.