Finance Research Seminar “Bankruptcy codes & risk sharing of currency unions’ ” by X. WANG – VU Amsterdam
Speakers: Xuan WANG
Date and Location – Thursday June 3rd 2021 from 12:30 to 14:00 on Zoom
Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a ﬁscal union in adjusting for country heterogeneity. However, a fully-ﬂedged ﬁscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the beneﬁts of the bankruptcy code of a capital markets union – in the absence of a ﬁscal union – as an alternative mechanism to improve the ﬁnancial stability and welfare of a currency union. When the banking sector cannot fully enforce loan repayment, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of ﬂoating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost beneﬁts of ﬂoating nominal exchange rates. The model provides the ﬁnancial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
Keywords: Equilibrium default, bankruptcy code, ﬁscal union, capital markets union, ﬁnancial stability, bank credit and inside money, price-level and exchange rate determinacy, liquidity-intermediary asset pricing