Working Paper: NBER ID: w15034
Authors: Sebnem Kalemli-Ozcan; Elias Papaioannou; Jose Luis Peydro
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 has also contributed to the spur of cross-border financial transactions. Trade in goods, while highly correlated with bilateral financial activities, does not play a key role in explaining the euro's positive effect on financial integration.
Keywords: Euro; Financial Integration; Currency Risk; Legislative Harmonization; 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 |
|---|---|
| introduction of the euro (F36) | reduction of exchange rate fluctuations (F31) |
| reduction of exchange rate fluctuations (F31) | increase in cross-border banking activities (F65) |
| legislative harmonization (F55) | increase in cross-border banking integration (F65) |
| introduction of the euro (F36) | increase in financial integration (F30) |
| trade in goods (F10) | financial activities (G29) |