The Euro and the Geography of International Debt Flows

46 Pages Posted: 14 Apr 2014

See all articles by Galina Hale

Galina Hale

Federal Reserve Bank of San Francisco

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2014

Abstract

Greater financial integration between core and peripheral EMU members not only had an effect on both sets of countries but also spilled over beyond the euro area. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. We present a stylized model that illustrates possible mechanisms for these developments. We then analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro's introduction, core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery. Moreover, we present evidence that large core EMU banks' lending to periphery borrowers was linked to their borrowing from outside of the euro area.

Suggested Citation

Hale, Galina and Obstfeld, Maurice, The Euro and the Geography of International Debt Flows (April 2014). NBER Working Paper No. w20033. Available at SSRN: https://ssrn.com/abstract=2424604

Galina Hale (Contact Author)

Federal Reserve Bank of San Francisco ( email )

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San Francisco, CA 94105
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HOME PAGE: http://www.frbsf.org/economic-research/economists/galina-hale/

Maurice Obstfeld

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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