TY  - JOUR
AU  - Agenor,Pierre-Richard
AU  - Aizenman,Joshua
TI  - Capital Market Imperfections and the Theory of Optimum Currency Areas
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14088
PY  - 2008
Y2  - June 2008
UR  - http://www.nber.org/papers/w14088
L1  - http://www.nber.org/papers/w14088.pdf
N1  - Author contact info:
Pierre-Richard Agenor
School of Social Sciences, University of Mancheste
Manchester M139PL, United Kingdom
E-Mail: Pierre-richard.Agenor@manchester.ac.uk

Joshua Aizenman
Department of Economics;  E2
1156 High St.
University of California, Santa Cruz
Santa Cruz, CA  95064
Tel: 831/459-4791
Fax: 831/459-5077
E-Mail: jaizen@ucsc.edu
AB  - This paper studies how capital market imperfections affect the welfare effects of forming a currency union. The analysis considers a bank-only world where intermediaries compete in Cournot fashion and monitoring and state verification are costly. The first part determines the credit market equilibrium and the optimal number of banks, prior to joining the union. The second part discusses the benefits from joining a currency union. A competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country, through an argument akin to the Brander-Krugman "reciprocal dumping" model of bilateral trade. Whether joining a union raises welfare of the home country is shown to depend on the relative strength of "investment creation" and "intermediation diversion" effects.
ER  -