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Information Flow in Times of Crisis: The Case of the European Banking and Sovereign Sectors
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.