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Monetary Union with A Single Currency and Imperfect Credit Market Integration

Listed author(s):
  • V. Bignon
  • R. Breton
  • M. Rojas Breu

With the Euro Area context in mind, we show that currency arrangements impact on credit available through default incentives. To this end we build a symmetric two-country model with money and imperfect credit market integration. Differences in credit market integration are captured by variations in the cost for banks to grant credit for cross-border purchases. We show that for high enough levels of this cost, currency integration may magnify default incentives, leading to more stringent credit rationing and lower welfare than in a regime of two currencies. The integration of credit markets restores the optimality of the currency union.

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File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_541_2015.pdf
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Paper provided by Banque de France in its series Working papers with number 541.

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Length: 75 pages
Date of creation: 2015
Handle: RePEc:bfr:banfra:541
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Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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