Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
The pattern of debt flows to peripheral European Monetary Union members seems puzzling: they are mostly indirect and channeled through the large countries of the European Monetary Union. This paper examines to what extent the introduction of the eu...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/06/26541999/euro-currency-risk-geography-debt-flows-peripheral-european-monetary-union-members http://hdl.handle.net/10986/24655 |
| Summary: | The pattern of debt flows to peripheral
European Monetary Union members seems puzzling: they are
mostly indirect and channeled through the large countries of
the European Monetary Union. This paper examines to what
extent the introduction of the euro and the elimination of
the intra-area currency risk can explain this puzzle. A
three-country dynamic stochastic general equilibrium
framework with endogenous portfolio choice and two
currencies is developed. In the equilibrium, the core
members of the European Monetary Union emerge as the main
group of lenders to the peripheral European Monetary Union
members. Outside lenders are pushed from the periphery debt
markets because of currency risk. The model generates a
pattern of debt flows consistent with the data despite the
absence of any exogenous frictions or market segmentations. |
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