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The Macroeconomic Effects of European Financial Development: A Heterogenous Panel Analysis

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  • Sean Holly
  • Mehdi Raissi

Abstract

This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.96141.de/diw_finess_01040.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Working Paper / FINESS with number 1.4.

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Length: 10, 4, 6 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diwfin:diwfin01040

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Cited by:
  1. TRIANDAFIL, Cristina Maria, 2013. "Sustainability of convergence in the context of macro-prudential policies in the European Union," Working Papers of National Institute of Economic Research 130618, National Institute of Economic Research.

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