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The Euro and The Geography of International Debt Flows

  • Galina Hale
  • Maurice Obstfeld

Greater financial integration between core and peripheral EMU members not only had an effect on both sets of countries but also spilled over beyond the euro area. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. We present a stylized model that illustrates possible mechanisms for these developments. We then analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro's introduction, core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery. Moreover, we present evidence that large core EMU banks' lending to periphery borrowers was linked to their borrowing from outside of the euro area.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20033.

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Date of creation: Apr 2014
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Publication status: published as The Euro and the Geography of International Debt Flows , Galina Hale, Maurice Obstfeld. in Sovereign Debt and Financial Crises , Kalemli-Ozcan, Reinhart, and Rogoff. 2016
Handle: RePEc:nbr:nberwo:20033
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