Monetary Union with a Single Currency and Imperfect Credit Market Integration

Vincent Bignon, Régis Breton () and Mariana Rojas-Breu

No 153, FIW Working Paper series from FIW

Abstract: This paper shows 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. With the Euro Area context in mind, we capture differences in credit market integration by variations in the cost for banks to grant credit for cross-border purchases. We show that for a high enough level 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.

Keywords: banks; currency union; monetary union; credit; default (search for similar items in EconPapers)
JEL-codes: E50 F3 G21 (search for similar items in EconPapers)
Pages: 53
Date: 2015-03
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Working Paper: Monetary Union with A Single Currency and Imperfect Credit Market Integration (2015)
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