Financial integration or financial fragmentation? A euro area perspective

Gabriel Arce-Alfaro and Boris Blagov

Economic Modelling, 2022, vol. 114, issue C

Abstract: In this article we address the question of how strongly bank lending rates and credit volumes co-move across the euro area. Following the breakdown in the interest rate pass-through across the euro area, we aim to disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables by using a time-varying two-level dynamic factor model. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. Furthermore, we find persistent heterogeneity across member states, specifically those hit hard by the sovereign-debt crisis.

Keywords: Co-movements; Financial fragmentation; Dynamic factor model (search for similar items in EconPapers)
JEL-codes: C11 C38 E43 E52 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001481

DOI: 10.1016/j.econmod.2022.105902

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