Open AccessTHE EURO AND THE GEOGRAPHY OF INTERNATIONAL DEBT FLOWS
Author(s) -
Hale Galina,
Obstfeld Maurice
Publication year - 2016
Publication title -
journal of the european economic association
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 7.792
H-Index - 93
eISSN - 1542-4774
pISSN - 1542-4766
DOI - 10.1111/jeea.12160
Subject(s) - stylized fact , leverage (statistics) , economics , boom , debt , international economics , core (optical fiber) , monetary economics , european monetary union , financial integration , macroeconomics , monetary policy , finance , financial market , materials science , machine learning , environmental engineering , computer science , engineering , composite material
Abstract Greater financial integration between core and peripheral European Monetary Union (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 the 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.