Publication: Essays on international macroeconomics: debt in emerging and developed economies
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Publication date
2017-10-10
Defense date
2017-09-15
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Abstract
We develop a simple model of borrowing and lending within the monetary union. We characterize the default decision of the borrowing country
and explore the impact that the monetary union has on the amount of
borrowing, the rate of interest and the default probability. The key assumptions of the modelling strategy are that in the monetary union, the
lender is risk averse with monopoly power rather than risk neutral with
perfect competition. We find that the borrowing member country of the
monetary union borrows more at cheaper cost vis-a-vis a standalone borrowing country. Further, we find that forming a monetary union with high
initial income disparity between the member countries leads to more and
cheaper borrowing and higher default probabilities.
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Keywords
Deuda pública, MacroeconomÃa, EconomÃa internacional, PaÃses en desarrollo