While the current account of euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries and show that these net flows follow differences in per-capita incomes. Our results show that the elasticity with respect to per-capita incomes of net capital flows between euro-area countries and the euro area has increased. This is not the case for net capital flows between non-euro area countries and the euro area, nor for euro-area countries and the rest of the world. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has lead to some financial diversion.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
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Find related papers by JEL classification: F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F34 - International Economics - - International Finance - - - International Lending and Debt Problems F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
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Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007.
"Foreign Capital and Economic Growth,"
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D. W. K. Andrews, 2003.
"End-of-Sample Instability Tests,"
Econometrica,
Econometric Society, vol. 71(6), pages 1661-1694, November.
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