Capital market imperfections and the theory of optimum currency areas

Arbeitspapier

This paper studies how capital market imperfections affect the welfare effects of forming a currency union. The analysis considers a bank-only world where intermediaries compete in Cournot fashion and monitoring and state verification are costly. The first part determines the credit market equilibrium and the optimal number of banks, prior to joining the union. The second part discusses the benefits from joining a currency union. A competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country, through an argument akin to the Brander- Krugman 'reciprocal dumping' model of bilateral trade. Whether joining a union raises welfare of the home country is shown to depend on the relative strength of 'investment creation' and 'intermediation diversion' effects.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 642

Classification and Topics

• Classification: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Financial Aspects of Economic Integration ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Finanzmarkt ; Unvollkommener Markt ; Währungsunion ; Optimaler Währungsraum ; Wohlfahrtsanalyse ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Agénor, Pierre-Richard ; Aizenman, Joshua
• Event: Veröffentlichung
• (who): University of California, Economics Department
• (where): Santa Cruz, CA
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/64534
• Last update: 10.03.2025, 11:42 AM CET