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Country default in a monetary union

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  • Lovleen Kushwah

Abstract

We develop a simple model of borrowing and lending within the monetary union. We characterize the default decision of the borrowing country and explore the impact that the monetary union has on the amount of borrowing, the rate of interest and the default probability. The key assumptions of the modelling strategy are that in the monetary union, the lender is risk averse with monopoly power rather than risk neutral with perfect competition. We find that the borrowing member country of the monetary union borrows more at cheaper cost vis-á-vis a standalone borrowing country. Further, we find that forming a monetary union with high initial income disparity between the member countries leads to more and cheaper borrowing and higher default probabilities.

Suggested Citation

  • Lovleen Kushwah, 2020. "Country default in a monetary union," Working Papers 2020_19, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2020_19
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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