Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members

The pattern of debt flows to peripheral European Monetary Union members seems puzzling: they are mostly indirect and channeled through the large countries of the European Monetary Union. This paper examines to what extent the introduction of the euro and the elimination of the intra-area currency risk can explain this puzzle. A three-country dynamic stochastic general equilibrium framework with endogenous portfolio choice and two currencies is developed. In the equilibrium, the core members of the European Monetary Union emerge as the main group of lenders to the peripheral European Monetary Union members. Outside lenders are pushed from the periphery debt markets because of currency risk. The model generates a pattern of debt flows consistent with the data despite the absence of any exogenous frictions or market segmentations.

Bibliographic Details

Main Authors:	Ersal-Kiziler, Eylem, Nguyen, Ha
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-06
Subjects:	FOREIGN ASSET, MONETARY POLICY, RISKS, HOLDING, REGULATORY FRAMEWORK, OUTSIDE INVESTORS, FOREIGN ASSET POSITION, NOMINAL WAGE, EXPOSURES, INTERNATIONAL CAPITAL, BOND HOLDERS, INTEREST, INTERNATIONAL SETTLEMENT, RATE OF RETURN, MARGINAL COST, MONEY SUPPLY, INTEREST RATE, PORTFOLIO CHOICE, EXCHANGE, DISCOUNT RATE, ASSET, PORTFOLIO, FOREIGN EXCHANGE RISK, DEFAULT RISK, BONDS, EUROPEAN MONETARY UNION, EQUILIBRIUM, LOAN, DISCOUNT, BUDGET CONSTRAINTS, BORROWERS, ASSET POSITIONS, PORTFOLIO CHOICES, ASSET POSITION, INTERNATIONAL BANK, LENDER, BUDGET, CENTRAL BANK, STEADY STATE, MONEY HOLDING, EXOGENOUS SHOCKS, CREDIT RATINGS, CURRENCY, TRADABLE GOOD, PORTFOLIOS, MONEY, DEBTS, MONETARY UNION, BANK DEBT, MONEY HOLDINGS, MARKETS, DEBT, RETURN, FOREIGN ASSETS, SETTLEMENT, DEBT FLOWS, CONSUMPTION EXPENDITURE, OPEN ECONOMY, BUSINESS CYCLE, LENDERS, INTERNATIONAL DEBT, FOREIGN LENDER, INTERNATIONAL ECONOMICS, LOANS, BOND HOLDER, CRISIS COUNTRIES, FINANCE, NEGATIVE SHOCK, LIBERALIZATION, BAILOUT, INFORMATION ASYMMETRY, DEBT HOLDINGS, EXPENDITURE, MARKET SEGMENTATIONS, INTERNATIONAL BORROWING, EQUITY, TRANSACTION, INVESTORS, CONSUMPTION, GENERAL EQUILIBRIUM, SOVEREIGN DEBT, OUTSIDE LENDERS, MARKET SEGMENTATION, BOND MARKETS, GOOD, GLOBAL BOND, TRADABLE GOODS, BOND PORTFOLIO, STATE BOND, RETURNS, BOND MARKET, RISK EXPOSURE, ECONOMY, BOND PORTFOLIOS, AGGREGATE CONSUMPTION, SHARES, ASSETS, REAL EXCHANGE RATE, TRANSACTION COSTS, MARKET, DEFAULT, FOREIGN EXCHANGE, PUBLIC DEBT, INTERNATIONAL PORTFOLIO, MARKET STRUCTURES, CREDIT RISK, EXPOSURE, HOLDINGS, INSURANCE, BUSINESS CYCLES, CURRENCIES, DEBT MARKETS, DEBT MARKET, EQUITY HOLDINGS, GOODS, INVESTOR, STOCKS, INVESTMENT, DOLLAR PRICES, RISK, BOND, SOVEREIGN BONDS, SHARE, COLLATERAL, PORTFOLIO HOLDINGS, SUPPLY, CURRENCY RISK, MONEY MARKET, PORTFOLIO INVESTMENT, INVESTMENTS, LENDING, NOMINAL INTEREST RATE, EXCHANGE RATE RISK, EXCHANGE RATE, RISK AVERSION, SECONDARY MARKET, LIABILITIES, HEDGE, DOMESTIC INVESTORS, WEIGHTS, CONSUMPTION BASKET, CLARITY, DOLLAR VALUE, ECONOMIES, INVESTING,
Online Access:	http://documents.worldbank.org/curated/en/2016/06/26541999/euro-currency-risk-geography-debt-flows-peripheral-european-monetary-union-members http://hdl.handle.net/10986/24655
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