With the Euro Area context in mind, we show that currency arrangements impact on credit available through default incentives. To this end we build a symmetric two-country model with money and imperfect credit market integration. Differences in credit market integration are captured by variations in the cost for banks to grant credit for cross-border purchases. We show that for high enough levels of this cost, currency integration may magnify default incentives, leading to more stringent credit rationing and lower welfare than in a regime of two currencies. The integration of credit markets restores the optimality of the currency union.
Vincent Bignon, Régis Breton and Mariana Rojas Breu
Classification JEL : E42, E50, F3, G21
Keywords : banks, currency union, monetary union, credit, default
Updated on: 06/12/2018 10:56