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Financial integration and growth — Why is Emerging Europe different?

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Author Info

  • Friedrich, Christian
  • Schnabel, Isabel
  • Zettelmeyer, Jeromin

Abstract

Using industry-level data, this paper tries to explain why financial integration raised growth differentials between externally dependent and less dependent industries in European transition countries, but not in other developing or advanced countries in the years preceding the current crisis. We argue that political integration with countries that have stronger political and economic institutions leads to growth-enhancing foreign investments because investors expect an improvement of institutions in the future. The empirical evidence supports the importance of political integration: within the group of developing countries, the effect of financial integration is larger in countries that are more strongly politically integrated. Such an effect is not found for advanced countries. Our results suggest that political integration can considerably increase the benefits of financial integration in developing countries, even when institutions are still weak.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 89 (2013)
Issue (Month): 2 ()
Pages: 522-538

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Handle: RePEc:eee:inecon:v:89:y:2013:i:2:p:522-538

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Financial integration; Political integration; Economic growth; European transition countries;

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References

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Cited by:
  1. Campos, Nauro F & Coricelli, Fabrizio & Moretti, Luigi, 2014. "Economic Growth and Political Integration: Estimating the Benefits from Membership in the European Union Using the Synthetic Counterfactuals Method," IZA Discussion Papers 8162, Institute for the Study of Labor (IZA).

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