This study hypothesizes that being part of a monetary union lowers a nation's risk of defaulting on its loans and of going bankrupt. Both an insurance model and an open economy model show a risk reduction benefit for countries that have joined a monetary union. As a result, individual countries can loosen their fiscal policy without any major repercussions since their currency is backed by other member nations. In order to empirically test the hypothesis, a modified risk regression model was tested using monthly data pooled for 13 countries from the years 2000 until 2010 to show the effects monetary union participation, fiscal policy, investors' risk perception and the country's financial market condition have on the default risk. While this conceptual hypothesis holds true on a theoretical basis, it lacks statistical significance to make any inferences using the risk model created.
Kroll, Katharina, "No Such Thing As a Free Ride: Sovereign Default Risk Reduction As a Result of Monetary Union Participation" (2012). Senior Independent Study Theses. Paper 783.
Bachelor of Arts
Senior Independent Study Thesis
© Copyright 2012 Katharina Kroll