Country default in a monetary union

Lovleen Kushwah

Working Papers from Business School - Economics, University of Glasgow

Abstract: We develop a simple model of borrowing and lending within the monetary union. We characterize the default decision of the borrowing country and explore the impact that the monetary union has on the amount of borrowing, the rate of interest and the default probability. The key assumptions of the modelling strategy are that in the monetary union, the lender is risk averse with monopoly power rather than risk neutral with perfect competition. We find that the borrowing member country of the monetary union borrows more at cheaper cost vis-á-vis a standalone borrowing country. Further, we find that forming a monetary union with high initial income disparity between the member countries leads to more and cheaper borrowing and higher default probabilities.

JEL-codes: E43 F33 F34 F41 F45 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2020_19

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