Back to the calendar
Oct
10
UCLouvain Economics Seminar - Luca Fornaro (CREI)

Luca Fornaro

(CREI)

will give a presentation on

Monetary Union and Financial Integration

Abstract:

It is often argued that forming a monetary union increases financial integration and leads to a more efficient allocation of capital across member countries. To investigate this claim, this paper provides a model connecting monetary policy and international capital flows. The key feature of the model is that  monetary policy affects the value of collateral that can be repossessed by creditors in case of default.  Once a country has accumulated a large stock of  external debt,  it is optimal for the government  to depreciate the exchange rate to expropriate foreign investors.  Anticipating this, under flexible exchange rates international investors  impose tight borrowing limits on foreign debtors.  In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. Higher financial integration may increase welfare by fostering capital flows from capital-abundant to capital-scarce countries. But a high degree of financial integration may also make episodes of inefficient capital flights out of capital-scarce countries possible.

Date
10 October
Time
12:45 - 14:00
Location
Doyen 22
Place des Doyens, 1
Ottignies-Louvain-la-Neuve,