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Financial integration in the euro area: Pro-cyclical effects and economic convergence

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  • van Ewijk, Saskia E.
  • Arnold, Ivo J.M.

Abstract

This paper investigates the role of financial integration in the macro-economic adjustment process of countries inside EMU. We employ a confidential bilateral version of the locational banking statistics granted to us by the Bank of International Settlements. We use this dataset to measure the impact of the external positions of banks in member countries on firstly, business cycle synchronization, and secondly, long-term economic convergence. To measure the impact on business cycle synchronization, we include intra-European bank capital flows in a New-Keynesian IS equation for the euro area. Second, we use the dataset on bilateral cross-border claims and liabilities to establish a long-term panel cointegration relationship between GDP, housing prices and net bank capital flows. Our results indicate that since the introduction of the euro, financial integration has negatively affected the macroeconomic adjustment process of countries within the union. Cross-border bank portfolios adversely affect business cycle synchronization as well as long-run convergence.

Suggested Citation

  • van Ewijk, Saskia E. & Arnold, Ivo J.M., 2015. "Financial integration in the euro area: Pro-cyclical effects and economic convergence," Economic Modelling, Elsevier, vol. 44(C), pages 335-342.
    • Handle: RePEc:eee:ecmode:v:44:y:2015:i:c:p:335-342
    DOI: 10.1016/j.econmod.2014.05.026
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    2. Ben Slimane, Faten & Boubaker, Sabri & Jouini, Jamel, 2020. "Does the Euro–Mediterranean Partnership contribute to regional integration?," Journal of Policy Modeling, Elsevier, vol. 42(2), pages 328-348.
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    More about this item

    Keywords

    European monetary union; Regional effects; Cross-border bank portfolios; Monetary transmission; Financial integration; International capital flows; Convergence;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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