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

By Sebnem Kalemli‐ozcan, Elias Papaioannou, José-Luis Peydró. Social Science Research Network, 2010

249 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/855ae2d3cedb3946fd0bed0df9aafebcb77a359f

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Citations in the corpus

External Imbalances in the Euro Area (2012, unknown): “The growing consensus is that the European Monetary Union stimulated capital flows by eliminating currency risk, while institutional reforms harmonizing financial sector policies and the integration of good markets among EU countries reduced transaction costs and led to the integration of European b”
The European Union, the Euro, and Equity Market Integration (2010, unknown): “The one paper with a similar panel data approach to ours is Kalemli-Ozcan et al. (2010).”
The Euro and the Geography of International Debt Flows (2014, methodology): “Fourth, financial regulations in the EU were harmonized (Kalemli-Ozcan et al., 2010) and the euro infrastructure implied a more efficient payment system though its TARGET settlement mechanism.”
Financial Regulation, Financial Globalization and the Synchronization of Economic Activity (2009, unknown): “Kalemli-Ozcan, Papaioannou, and Peydro (2010) show that the strong e↵ect of legislative/regulatory harmonization policies in financial services in spurring cross-border activities is robust to a variety of permutations.”