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

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  • Ersal-Kiziler, Eylem
  • Nguyen, Ha

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.

Suggested Citation

  • Ersal-Kiziler, Eylem & Nguyen, Ha, 2016. "Euro currency risk and the geography of debt flows to peripheral EMU," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 1-20.
    • Handle: RePEc:eee:jimfin:v:68:y:2016:i:c:p:1-20
    DOI: 10.1016/j.jimonfin.2016.06.013
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    More about this item

    Keywords

    EMU; Euro; Debt flows; DSGE models; Portfolio choice;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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