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Currency union with or without banking union

Author

Listed:
  • Vincent Bignon

    (Banque de France - Gaz de France Direction de la Recherche)

  • Régis Breton

    (Banque de France - Gaz de France Direction de la Recherche)

  • Mariana Rojas Breu

    (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine)

Abstract

We build a symmetric two‐country monetary model with credit to study the interplay between currency integration and credit markets integration. The currency arrangement affects credit availability through default incentives. We capture credit markets integration by the extra cost incurred to obtain credit for cross‐border transactions and, with the euro area context in mind, label as banking union a situation where this cost is low. For high levels of the cross‐border credit cost, currency integration may magnify default incentives, leading to more credit rationing and lower welfare. The integration of credit markets restores the optimality of the currency union.

Suggested Citation

  • Vincent Bignon & Régis Breton & Mariana Rojas Breu, 2019. "Currency union with or without banking union," Post-Print hal-02313956, HAL.
    • Handle: RePEc:hal:journl:hal-02313956
    DOI: 10.1111/iere.12373
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02313956
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    References listed on IDEAS

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    Keywords

    banks; currency union; credit; default; limited commitment;

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