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Structural asymmetries and financial imbalances in the eurozone

Ivan Jaccard () and Frank Smets

No 2076, Working Paper Series from European Central Bank

Abstract: Almost two decades after the introduction of the common currency differences in institutional frameworks remain a major source of cross-country heterogeneity in the eurozone. We develop a two-country model with incomplete international markets in which the availability of credit depends on the country’s institutional environment. Our main finding is that structural differences in domestic credit environments provide an explanation for the procyclicality of net capital inflows observed in the South of Europe. We show that frictions in domestic credit markets generate asymmetries in the transmission mechanism of shocks that are common to both regions. JEL Classification: F32, F20, G17

Keywords: cross-border financial markets; eurozone crisis; incomplete international asset markets; structural reforms (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
Date: 2017-06
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172076

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