Euro currency risk and the geography of debt flows to peripheral European monetary union members

Eylem Ersal-Kiziler and Ha Nguyen
Authors registered in the RePEc Author Service: Eylem Ersal-Kiziler

No 7738, Policy Research Working Paper Series from The World Bank

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 European Monetary Union. This paper examines to what extent the introduction of the euro and the elimination of the intra-area currency risk can explain this puzzle. A three-country dynamic stochastic general equilibrium framework with endogenous portfolio choice and two currencies is developed. In the equilibrium, the core members of the European Monetary Union emerge as the main group of lenders to the peripheral European Monetary Union members. Outside lenders are pushed from 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: Capital Markets and Capital Flows; Economic Insecurity; Capital Flows (search for similar items in EconPapers)
Date: 2016-06-30
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:7738

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