Structural Asymmetries and Financial Imbalances in the Eurozone

51 Pages Posted: 20 Jun 2017

See all articles by Ivan Jaccard

Ivan Jaccard

European Central Bank (ECB) - Directorate General Research

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Date Written: June 19, 2017

Abstract

Almost two decades after the introduction of the common currency, differences in institutional frameworks remain a major source of cross-country heterogeneity in the eurozone. We develop a two-country model with incomplete international markets in which the availability of credit depends on the country’s institutional environment. Our main finding is that structural differences in domestic credit environments provide an explanation for the procyclicality of net capital inflows observed in the South of Europe. We show that frictions in domestic credit markets generate asymmetries in the transmission mechanism of shocks that are common to both regions.

Keywords: Cross-Border Financial Markets, Eurozone Crisis, Incomplete International Asset Markets, Structural Reforms

JEL Classification: F32, F20, G17

Suggested Citation

Jaccard, Ivan and Smets, Frank, Structural Asymmetries and Financial Imbalances in the Eurozone (June 19, 2017). ECB Working Paper No. 2076, Available at SSRN: https://ssrn.com/abstract=2989602

Ivan Jaccard (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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