Daniel Garcia-Macia
International Monetary Fund
Financial shocks in a sector of the economy transmit to other sectors via financial linkages. This paper constructs the matrix of bilateral financial sectoral exposures in Italy over the last two decades. Using this information, it develops a method to simulate how each sector absorbs plausible financial shocks. A fall in the value of government bonds directly affects banks and indirectly affects households via equity holdings in banks. A bank bail-in is absorbed by foreigners and by households, particularly those at the top of the wealth distribution. Conversely, in a bank bailout these two groups benefit from a government transfer.
JEL Code: G11, G32, G33.
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