What Lies Beneath the Euro's Effect on Financial Integration? Currency Risk, Legal Harmonization, or Trade?

Kalemli-Özcan, Sebnem, Elias Papaioannou and Peydró, José-Luis
Authors registered in the RePEc Author Service: Sebnem Kalemli-Ozcan and Jose-Luis Peydro

No 7314, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro's effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro's impact on financial integration is primarily driven by eliminating the currency risk. Legislative-regulatory convergence explains part of the total effect, whereas trade has no role in explaining the euro's positive effect on integration.

Keywords: Euro; exchange rate; Financial integration; Legislation; Regulation; Trade (search for similar items in EconPapers)
JEL-codes: F10 F15 F30 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-opm and nep-reg
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade? (2010)
Working Paper: What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade? (2010)
Working Paper: What Lies Beneath the Euro's Effect on Financial Integration: Currency Risk, Legal Harmonization, or Trade? (2009)
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