Financial integration in the euro area: Pro-cyclical effects and economic convergence

Saskia de Vries-van Ewijk and Ivo Arnold ()

Economic Modelling, 2015, vol. 44, issue C, 335-342

Abstract: This paper investigates the role of financial integration in the macro-economic adjustment process of countries inside EMU. We employ a confidential bilateral version of the locational banking statistics granted to us by the Bank of International Settlements. We use this dataset to measure the impact of the external positions of banks in member countries on firstly, business cycle synchronization, and secondly, long-term economic convergence. To measure the impact on business cycle synchronization, we include intra-European bank capital flows in a New-Keynesian IS equation for the euro area. Second, we use the dataset on bilateral cross-border claims and liabilities to establish a long-term panel cointegration relationship between GDP, housing prices and net bank capital flows. Our results indicate that since the introduction of the euro, financial integration has negatively affected the macroeconomic adjustment process of countries within the union. Cross-border bank portfolios adversely affect business cycle synchronization as well as long-run convergence.

Keywords: European monetary union; Regional effects; Cross-border bank portfolios; Monetary transmission; Financial integration; International capital flows; Convergence (search for similar items in EconPapers)
JEL-codes: E58 G28 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:44:y:2015:i:c:p:335-342

DOI: 10.1016/j.econmod.2014.05.026

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