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Currency Risk and Business Cycle Risk in the Geography of Debt Flows to Peripheral Europe

Author

Listed:
  • Eylem Ersal Kiziler

    (Department of Economics, University of Wisconsin - Whitewater)

  • Ha Nguyen

    (Development Research Group, World Bank)

Abstract

Since the start of the Eurozone, the pattern of debt ows to Peripheral Europe seems puzzling: they were mostly indirect and intermediated by the large countries of the euro area. This paper examines the euro currency risk and the business cycle risk as two opposing forces: while the currency risk favors Core Europe in lending to Peripheral Europe, business cycle risk favors outsider lenders. We explain the mechanisms and show that both forces are strong. In a 3-country DSGE model with endogenous portfolio choices, without the business cycle risk, currency risk completely pushes outside lenders out of the Peripheral bond market. With both types of risk, Core Europe and outside lenders hold 40 and 60 percents of Peripheral bonds respectively. The results suggest that other factors such as asymmetric information or bailout discrimination are also at play.

Suggested Citation

  • Eylem Ersal Kiziler & Ha Nguyen, 2014. "Currency Risk and Business Cycle Risk in the Geography of Debt Flows to Peripheral Europe," Working Papers 14-03, UW-Whitewater, Department of Economics.
    • Handle: RePEc:uww:wpaper:14-03
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Debt Flows; Business Cycle Risk;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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