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Monetary Union with a Single Currency and Imperfect Credit Market Integration

Listed author(s):
  • Vincent Bignon
  • Régis Breton
  • Mariana Rojas Breu

This paper shows 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. With the Euro Area context in mind, we capture differences in credit market integration by variations in the cost for banks to grant credit for cross-border purchases. We show that for a high enough level 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.

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Paper provided by FIW in its series FIW Working Paper series with number 153.

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Length: 53
Date of creation: Mar 2015
Handle: RePEc:wsr:wpaper:y:2015:i:153
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