Working Paper: CEPR ID: DP8137
Authors: Christian Friedrich; Isabel Schnabel; Jeromin Zettelmeyer
Abstract: Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyze several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the EU. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.
Keywords: economic growth; european transition economies; financial integration; political integration
JEL Codes: F32; F36; G21; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial integration (F30) | higher growth (O49) |
| political integration (F55) | enhanced financial integration benefits (F30) |
| political integration + financial integration (F30) | stronger growth effects (O49) |
| political integration (F55) | entry of foreign banks (F65) |
| entry of foreign banks (F65) | economic growth (O49) |
| financial integration + external financing dependence (F30) | higher growth (O49) |