Euro currency risk and the geography of debt flows to peripheral EMU

Eylem Ersal-Kiziler and Ha Nguyen
Authors registered in the RePEc Author Service: Ha Nguyen, Eylem Ersal-Kiziler and Nguyen Phu Ha ()

Journal of International Money and Finance, 2016, vol. 68, issue C, 1-20

Abstract: The pattern of debt flows to peripheral European Monetary Union members seems puzzling: they are mostly indirect and channeled through the large countries of the EMU. We examine to what extent the introduction of the euro and the elimination of the intra-area currency risk can explain this puzzle. We develop a three-country DSGE framework with endogenous portfolio choice and two currencies. In the equilibrium, the core members of the EMU emerge as the main group of lenders to the peripheral EMU. Outside lenders are pushed out of the periphery debt markets because of currency risk. The model generates a pattern of debt flows consistent with the data despite the absence of any exogenous frictions or market segmentations.

Keywords: EMU; Euro; Debt flows; DSGE models; Portfolio choice (search for similar items in EconPapers)
JEL-codes: F32 F34 G11 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:68:y:2016:i:c:p:1-20

DOI: 10.1016/j.jimonfin.2016.06.013

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