We develop a two-country model with an explicitly microfounded interbank market and sovereign default risk. Calibrated to the core and the periphery of the Euro Area, the model gives rise to a debt-banks-credit loop that substantially amplifies the effects of financial shocks, especially for the...

This paper evaluates the welfare gains arising from a deeper trade integration in the European Monetary Union. To do this, the European Monetary Union is represented in a realistic way by an intertemporal general equilibrium model with incomplete financial markets, sticky prices and home bias...

We quantify the effects of competitive tax reforms within a two-country monetary union model with endogenous entry and endogenous tradability. As expected, their effects on out-put, consumption, hours worked and the terms of trade are positive. Extensive margins provide additional transmission...