Working Paper: CEPR ID: DP9937
Authors: Galina Hale; Maurice Obstfeld
Abstract: Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. 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. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We 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.
Keywords: EMU; Euro Crisis; Global Imbalances; International Banking; International Debt
JEL Codes: F32; F34; F36
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of the euro (F36) | increased financial integration between core and peripheral EMU members (F36) |
| increased financial integration between core and peripheral EMU members (F36) | lower interest rates in peripheral countries (E43) |
| lower interest rates in peripheral countries (E43) | increased borrowing by peripheral EMU countries (F36) |
| increased borrowing by peripheral EMU countries (F36) | domestic lending booms and asset price inflation in peripheral countries (F65) |
| core EMU countries (F36) | increased foreign leverage and lending to the periphery (F65) |
| increased foreign leverage and lending to the periphery (F65) | asset price bubbles in peripheral nations (F65) |
| asset price bubbles in peripheral nations (F65) | financial crises in peripheral nations (F65) |
| introduction of the euro (F36) | enhanced financial fragility in the region (F65) |