Heterogeneity, co-movements and financial fragmentation within the euro area

Gabriel Arce-Alfaro and Boris Blagov

No 927, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: In this article we analyse the degree of commonality across euro area countries in the bank lending rates and credit volumes. Using a time-varying two-level dynamic factor model, we disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables. 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. There is heterogeneity across member states, specifically those hit hard by the crisis. We observe high commonality in the financial variables, which increases in periods of high financial volatility.

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: 2021
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:927

DOI: 10.4419/96973085

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