Working Paper: CEPR ID: DP7314
Authors: Sebnem Kalemli-Ozcan; Elias Papaioannou; Jos Luis Peydr Alcalde
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.
Keywords: Euro; Exchange Rate; Financial Integration; Legislation; Regulation; Trade
JEL Codes: F10; F15; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| euro introduction (F36) | bilateral bank holdings (F34) |
| euro introduction (F36) | banking transactions (G21) |
| elimination of currency risk (F31) | financial integration (F30) |
| euro introduction (F36) | reduction in exchange rate volatility (F31) |
| euro introduction (F36) | legislative and regulatory convergence (G38) |
| trade does not explain euro's effect on financial integration (F36) | banking activities (G21) |