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Monetary Union with A Single Currency and Imperfect Credit Market Integration

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  • V. Bignon
  • R. Breton
  • M. Rojas Breu

Abstract

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.

Suggested Citation

  • V. Bignon & R. Breton & M. Rojas Breu, 2015. "Monetary Union with A Single Currency and Imperfect Credit Market Integration," Working papers 541, Banque de France.
  • Handle: RePEc:bfr:banfra:541
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    Cited by:

    1. Pedro, Gomis-Porqueras & Cathy, Zhang, 2018. "Optimal Monetary and Fiscal Policy with Migration in a Currency Union," MPRA Paper 83754, University Library of Munich, Germany.

    More about this item

    Keywords

    banks; currency union; monetary union; credit; default.;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F3 - International Economics - - International Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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