{
  "title": "An Imperfect Financial Union With Heterogeneous Regions",
  "publication": "IMF Working Papers, September 11, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214",
  "canonical": "https://www.imf.org/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214",
  "overlayPath": "/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/index.md",
  "summary": "We analyze a union of financially-integrated yet politically-sovereign countries, where households in the Northern core of the union lend to those in the Southern periphery in a unified debt market subject to a borrowing constraint.",
  "sections": [
    {
      "heading": "Summary and main findings",
      "content": "- The paper analyzes a union of financially-integrated yet politically-sovereign countries, where households in the Northern core of the union lend to those in the Southern periphery in a unified debt market subject to a borrowing constraint.\n- The borrowing constraint:\n  - generates sudden stops throughout the South,\n  - depresses the intra-union interest rate,\n  - reduces Northern welfare below its unconstrained level,\n  - has ambiguous effects on Southern welfare.\n- During sudden stops, Pareto improvements can be achieved:\n  - using North-to-South governmental loans if Southern governments have the capacity to commit to repay, or\n  - using a combination of Southern debt relief and budget-neutral taxes and subsidies if they do not.\n- From the pre-crisis perspective, it is Pareto-improving to allow loans and debt relief to be negotiated in later sudden-stop periods as long as the regions in the union are sufficiently heterogeneous to begin with."
    },
    {
      "heading": "Mechanisms and concepts emphasized",
      "content": "- Unified debt market with a borrowing constraint\n- Sudden stops in the South driven by the borrowing constraint\n- Intra-union interest rate depression (shadow interest rate effects implied)\n- Welfare impacts:\n  - Northern welfare reduced below its unconstrained level\n  - Southern welfare effects ambiguous\n- Policy instruments considered:\n  - North-to-South governmental loans (conditional on Southern government commitment capacity)\n  - Southern debt relief combined with budget-neutral taxes and subsidies (when commitment capacity absent)\n- Laissez-faire equilibrium and the potential for Pareto-improving interventions during crises"
    },
    {
      "heading": "Policy recommendations and scenarios",
      "content": "- Permit negotiated loans and debt relief in later sudden-stop periods from the pre-crisis perspective, conditional on sufficient heterogeneity across regions in the union.\n- Use governmental loans from North to South when Southern governments can commit to repay to achieve Pareto improvements during sudden stops.\n- Use combinations of Southern debt relief and budget-neutral tax-subsidy policies when Southern governments cannot commit to repay."
    },
    {
      "heading": "Robustness and extensions",
      "content": "- Results are robust to:\n  - production,\n  - limited financial openness of the union.\n\n---\n\n Content in this bundle\n\n- An Imperfect Financial Union with Heterogeneous Regions, WP/18/205, September 2018\n  - An Imperfect Financial Union with Heterogeneous Regions, WP/18/205, September 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - An Imperfect Financial Union with Heterogeneous Regions, WP/18/205, September 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/index.md)",
    "[Structured JSON version](/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/index.json)",
    "[Bundle manifest](/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/bundle-manifest.json)",
    "Authors: Filippo Balestrieri, Suman S Basu",
    "Published: September 11, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484375631.001",
    "The paper analyzes a union of financially-integrated yet politically-sovereign countries, where households in the Northern core of the union lend to those in the Southern periphery in a unified debt market subject to a borrowing constraint.",
    "The borrowing constraint:",
    "During sudden stops, Pareto improvements can be achieved:",
    "From the pre-crisis perspective, it is Pareto-improving to allow loans and debt relief to be negotiated in later sudden-stop periods as long as the regions in the union are sufficiently heterogeneous to begin with.",
    "Unified debt market with a borrowing constraint",
    "Sudden stops in the South driven by the borrowing constraint",
    "Intra-union interest rate depression (shadow interest rate effects implied)",
    "Welfare impacts:",
    "Policy instruments considered:",
    "Laissez-faire equilibrium and the potential for Pareto-improving interventions during crises",
    "Permit negotiated loans and debt relief in later sudden-stop periods from the pre-crisis perspective, conditional on sufficient heterogeneity across regions in the union.",
    "Use governmental loans from North to South when Southern governments can commit to repay to achieve Pareto improvements during sudden stops.",
    "Use combinations of Southern debt relief and budget-neutral tax-subsidy policies when Southern governments cannot commit to repay.",
    "Results are robust to:",
    "**An Imperfect Financial Union with Heterogeneous Regions, WP/18/205, September 2018**"
  ],
  "related": [
    {
      "title": "An Imperfect Financial Union with Heterogeneous Regions, WP/18/205, September 2018",
      "role": "document",
      "sourceUrl": "https://www.imf.org/-/media/files/publications/wp/2018/wp18205.pdf",
      "summary": {
        "path": "/-/media/files/publications/wp/2018/wp18205.pdf.md",
        "mime": "text/markdown"
      },
      "binary": {
        "path": "/-/media/files/publications/wp/2018/wp18205.pdf",
        "mime": "application/pdf"
      }
    }
  ],
  "alternates": {
    "markdown": "/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/index.md",
    "json": "/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/index.json",
    "bundleManifest": "/en/publications/wp/issues/2018/09/11/an-imperfect-financial-union-with-heterogeneous-regions-46214/bundle-manifest.json"
  },
  "generatedAtUtc": "2026-09-18T14:01:57.569Z"
}