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 eu...

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Main Authors:	Ersal-Kiziler, Eylem, Nguyen, Ha
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
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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spelling	okr-10986-246552021-04-23T14:04:23Z Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members Ersal-Kiziler, Eylem Nguyen, Ha 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 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. 2016-07-11T15:41:17Z 2016-07-11T15:41:17Z 2016-06 Working Paper 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 English en_US Policy Research Working Paper;No. 7338 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Policy Research Working Paper Publications & Research Publications & Research :: Policy Research Working Paper Europe and Central Asia Eastern Europe Europe European Union
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	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
spellingShingle	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 Ersal-Kiziler, Eylem Nguyen, Ha Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
geographic_facet	Europe and Central Asia Eastern Europe Europe European Union
relation	Policy Research Working Paper;No. 7338
description	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.
format	Working Paper
author	Ersal-Kiziler, Eylem Nguyen, Ha
author_facet	Ersal-Kiziler, Eylem Nguyen, Ha
author_sort	Ersal-Kiziler, Eylem
title	Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
title_short	Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
title_full	Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
title_fullStr	Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
title_full_unstemmed	Euro Currency Risk and the Geography of Debt Flows to Peripheral European Monetary Union Members
title_sort	euro currency risk and the geography of debt flows to peripheral european monetary union members
publisher	World Bank, Washington, DC
publishDate	2016
url	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
_version_	1764457297843585024

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

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