We develop a simple model of borrowing and lending within the monetary union. We characterize the default decision of the borrowing country
and explore the impact that the monetary union has on the amount of
borrowing, the rate of interest and the default probability. The key assumptions of the modelling strategy are that in the monetary union, the
lender is risk averse with monopoly power rather than risk neutral with
perfect competition. We find that the borrowing member country of the
monetary union borrows more at cheaper cost vis-a-vis a standalone borrowing country. Further, we find that forming a monetary union with high
initial income disparity between the member countries leads to more and
cheaper borrowing and higher default probabilities.Programa Oficial de Doctorado en EconomíaPresidente: Sayantan Ghosal.- Secretario: Hernán Daniel Seoane Bernadaz.- Vocal: José María da Roch