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Capital Market Imperfections and the Theory of Optimum Currency Areas

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  • Agenor, Pierre-Richard
  • Aizenman, Joshua

Abstract

This paper studies how capital market imperfections affect the welfare effects of forming a currency union. The analysis considers a bank-only world where intermediaries compete in Cournot fashion and monitoring and state verification are costly. The first part determines the credit market equilibrium and the optimal number of banks, prior to joining the union. The second part discusses the benefits from joining a currency union. A competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country, through an argument akin to the Brander- Krugman “reciprocal dumping†model of bilateral trade. Whether joining a union raises welfare of the home country is shown to depend on the relative strength of “investment creation†and “intermediation diversion†effects.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt7668j94x.

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Date of creation: 03 Jun 2008
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Handle: RePEc:cdl:ucscec:qt7668j94x

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Keywords: capital market imperfections; theory of optimum currency;

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Cited by:
  1. Timo Baas, 2014. "Estonia and the European Monetary Union – Are there Benefi ts from a “Late” Accession?," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0489, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  2. Garcia Rocabado, Daniel, 2010. "The road to monetary union in Latin America: An EMS-type fixed exchange rate system as an intermediate step," W.E.P. - Würzburg Economic Papers, University of Würzburg, Chair for Monetary Policy and International Economics 85, University of Würzburg, Chair for Monetary Policy and International Economics.
  3. Luiz Carlos Bresser-Pereira & Marcio Holland, 2009. "Common currency and economic integration in Mercosul," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., M.E. Sharpe, Inc., vol. 32(2), pages 213-234, December.
  4. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Jan Bruha & Tomas Holub & Eva Hromadkova & David Kocourek & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava & Petr Kral & Ivana Kubicova & Ji, 2013. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2013," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, Czech National Bank, Research Department, number as13 edited by Jakub Mateju & Kamila Kulhava, August.

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