タイトル：Financial Stability with Sovereign Debt
How can we eliminate financial and debt fragility in an indebted country? We study this question in a model of financial intermediation with sovereign debt. The financial and government sectors have three links: tax collection, bond holding, and government transfer, which transmit a shock from one to another. These channels make financial crisis and sovereign default interdependent, which compose a loop. The policy maker has to take it into account to consider a policy to eliminate financial and debt fragility from the economy. This structure gives a tradeoff between financial stability and debt stability, and we analyze the liquidity coverage ratio regulation, government transfer and a mix of them in this environment. Our results show that neither of them always dominates the others to eliminate fragility. Given an economic situation, we derive an optimal policy to promote financial stability and improve the allocation of resources accordingly.