You are here

Working Paper Series no. 541: Monetary Union with A Single Currency and Imperfect Credit Market Integration

Abstract

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
March 2015

Classification JEL : E42, E50, F3, G21

Keywords : banks, currency union, monetary union, credit, default

Download the PDF version of this document

publication
Working Paper Series no. 541: Monetary Union with A Single Currency and Imperfect Credit Market Integration
  • Published on 03/31/2015
  • EN
  • PDF (740.15 KB)
Download (EN)

Updated on: 06/12/2018 10:56