Currency Risk and Business Cycle Risk in the Geography of Debt Flows to Peripheral Europe

Eylem Ersal Kiziler and Ha Nguyen ()
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Ha Nguyen: Development Research Group, World Bank
Authors registered in the RePEc Author Service: Ha Nguyen and Nguyen Phu Ha ()

Working Papers from UW-Whitewater, Department of Economics

Abstract: Since the start of the Eurozone, the pattern of debt ows to Peripheral Europe seems puzzling: they were mostly indirect and intermediated by the large countries of the euro area. This paper examines the euro currency risk and the business cycle risk as two opposing forces: while the currency risk favors Core Europe in lending to Peripheral Europe, business cycle risk favors outsider lenders. We explain the mechanisms and show that both forces are strong. In a 3-country DSGE model with endogenous portfolio choices, without the business cycle risk, currency risk completely pushes outside lenders out of the Peripheral bond market. With both types of risk, Core Europe and outside lenders hold 40 and 60 percents of Peripheral bonds respectively. The results suggest that other factors such as asymmetric information or bailout discrimination are also at play.

Keywords: Debt Flows; Business Cycle Risk (search for similar items in EconPapers)
JEL-codes: F4 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2014-08
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
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