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Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?

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  • Peter Spahn

Abstract

We analyze the benefits and costs of a non-euro country opting-in to the banking union. The decision to opt-in depends on the comparison between the assessment of the banking union attractiveness and the robustness of a national safety net. The benefits of opting-in are still only potential and uncertain, while costs are more tangible. Due to treaty constraints, noneuro countries participating in the banking union will not be on equal footing with euro area members. Analysis presented in the paper points out that reducing the weaknesses of the banking union and thus providing incentives for opting-in is not probable in the short term, mainly due to political constraints. Until a fully-fledged banking union with well-capitalized backstops is established it may be optimal for a non-euro country to join the banking union upon the euro adoption. Assessing first experiences with the functioning of the banking union and opt-in countries will be crucial for non-euro countries when deciding whether to opt-in.

Suggested Citation

  • Peter Spahn, 2016. "Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?," ROME Working Papers 201610, ROME Network.
  • Handle: RePEc:rmn:wpaper:201610
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    References listed on IDEAS

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    More about this item

    Keywords

    currency union; lender of last resort; central bank reserves; central bank budget constraint;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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