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

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Author Info
Sean Holly
Mehdi Raissi

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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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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
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Handle: RePEc:diw:diwfin:diwfin01040

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  5. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October. [Downloadable!] (restricted)
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  6. Reisen, Helmut & Soto, Marcelo, 2001. "Which Types of Capital Inflows Foster Developing-Country Growth?," International Finance, Blackwell Publishing, vol. 4(1), pages 1-14, Spring. [Downloadable!] (restricted)
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  8. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I. [Downloadable!] (restricted)
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  12. Peter Pedroni, 2007. "Social capital, barriers to production and capital shares: implications for the importance of parameter heterogeneity from a nonstationary panel approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 429-451. [Downloadable!]
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  18. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September. [Downloadable!] (restricted)
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  19. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312. [Downloadable!]
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  20. Jan J.J. Groen & Frank R. Kleibergen, 1999. "Likelihood-Based Cointegration Analysis in Panels of Vector Error Correction Models," Tinbergen Institute Discussion Papers 99-055/4, Tinbergen Institute. [Downloadable!]
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  21. Christian Gengenbach & Franz C. Palm & Jean-Pierre Urbain, 2006. "Cointegration Testing in Panels with Common Factors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 683-719, December. [Downloadable!] (restricted)
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