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What Lies Beneath the Euro's Effect on Financial Integration: Currency Risk, Legal Harmonization, or Trade?

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Author Info
Sebnem Kalemli-Ozcan
Elias Papaioannou
José-Luis Peydró

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Abstract

Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro's effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro's impact on financial integration is primarily driven by eliminating the currency risk. Legislative-regulatory convergence explains part of the total effect, whereas trade has no role in explaining the euro's positive effect on integration.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15034.

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Date of creation: Jun 2009
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Handle: RePEc:nbr:nberwo:15034

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F10 - International Economics - - Trade - - - General
F15 - International Economics - - Trade - - - Economic Integration
F30 - International Economics - - International Finance - - - General

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