The evolution of debtor-creditor relationships within a monetary union: trade imbalances, excess reserves and economic policy

This paper analyses the emergence of internal debtor-creditor relationships within a monetary union. Developing a stock-flow consistent model consisting of three regions - North, South, and the Rest of the World (RoW), where North and South form a monetary union - it shows how the simultaneous presence of investment booms, declining export performance and mercantilist policies within a monetary union can interact in order to create Minsky-type boom-bust cycles. Fiscal policy and an internal lender of last resort can help sustain economic life under existing structural imbalances, though without eliminating the root causes of boom-bust patterns.