Show simple item record Fornaro, Luca 2021-10-07T06:19:29Z 2021-10-07T06:19:29Z 2021
dc.identifier.citation Fornaro L. A theory of monetary union and financial integration. Rev Econ Stud. 2021 Sep 16. DOI: 10.1093/restud/rdab057
dc.identifier.issn 0034-6527
dc.description Data de publicació electrònica: 16-09-21
dc.description.abstract Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize upon default. Under flexible exchange rates, national governments can expropriate foreign creditors by depreciating the exchange rate, which induces investors to impose tight constraints on international borrowing. Creating a monetary union, by eliminating this source of currency risk, increases financial integration among member countries. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of capital mobility can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation.
dc.description.sponsorship Financial support from the European Research Council under the European Union’s Horizon 2020 research and innovation program, Starting Grant (851896-KEYNESGROWTH) and the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV2015-0563 and CEX2019-000915-S), and from the Generalitat de Catalunya, through CERCA and SGR Programme (2017-SGR-1393), is gratefully acknowledged.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.publisher Oxford University Press
dc.relation.ispartof Rev Econ Stud. 2021 Sep 16. DOI: 10.1093/restud/rdab057
dc.rights © The Author(s) 2021. Published by Oxford University Press on behalf of The Review of Economic Studies Limited. This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs licence (, which permits non-commercial reproduction and distribution of the work, in any medium, provided the original work is not altered or transformed in any way, and that the work is properly cited.
dc.title A theory of monetary union and financial integration
dc.type info:eu-repo/semantics/article
dc.subject.keyword Monetary unions
dc.subject.keyword International financial integration
dc.subject.keyword Exchange rates
dc.subject.keyword Optimal currency area
dc.subject.keyword Capital flights
dc.subject.keyword Euro area
dc.subject.keyword External constraint
dc.subject.keyword Fiscal unions
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/851896
dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
dc.relation.projectID info:eu-repo/grantAgreement/ES/2PE/CEX2019-000915-S
dc.rights.accessRights info:eu-repo/semantics/openAccess
dc.type.version info:eu-repo/semantics/publishedVersion


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