Capital market imperfections and the theory of optimum currency areas

Abstract

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 BranderKrugman "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.JEL Classification Numbers: E43, F36, G28.

Board Capital, CEO Power and Investment Efficiency of Firms listed in Nairobi Securities Exchange in Kenya

“…Companies with financially trained directors can monitor and minimize risk and comprehend the firm's hedging policy behavior. Firms with more financial professionals on their boards have excellent supervision of their plans and policies and can recognize and handle risk (Gore, Matsunaga, & Eric Yeung, 2011). According to Güner et al (2008), appointing financial professionals on the board can result in access to credit corporations with lower-risk rates.…”