A theory of monetary union and financial integration

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• dc.contributor.author Fornaro, Luca
• dc.date.accessioned 2021-10-07T06:19:29Z
• dc.date.available 2021-10-07T06:19:29Z
• dc.date.issued 2022
• 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.identifier.citation Fornaro L. A theory of monetary union and financial integration. Rev Econ Stud. 2022 Jul;89(4):1911-47. DOI: 10.1093/restud/rdab057
• dc.identifier.doi http://dx.doi.org/10.1093/restud/rdab057
• dc.identifier.issn 0034-6527
• dc.identifier.uri http://hdl.handle.net/10230/48584
• dc.language.iso eng
• dc.publisher Oxford University Press
• dc.relation.ispartof Review of Economic Studies. 2022 Jul;89(4):1911-47
• 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 © 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 (http://creativecommons.org/licenses/by-nc-nd/4.0/), 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.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/4.0/
• 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.title A theory of monetary union and financial integration
• dc.type info:eu-repo/semantics/article
• dc.type.version info:eu-repo/semantics/publishedVersion