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

43 Pages Posted: 3 Jun 2009 Last revised: 30 Jan 2022

See all articles by Sebnem Kalemli-Ozcan

Sebnem Kalemli-Ozcan

University of Maryland - Department of Economics; National Bureau of Economic Research (NBER); Koc University, Graduate School of Business

Elias Papaioannou

Dartmouth College - Department of Economics

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: June 2009

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.

Suggested Citation

Kalemli-Ozcan, Sebnem and Papaioannou, Elias and Peydro, Jose-Luis, What Lies Beneath the Euro's Effect on Financial Integration: Currency Risk, Legal Harmonization, or Trade? (June 2009). NBER Working Paper No. w15034, Available at SSRN: https://ssrn.com/abstract=1413598

Sebnem Kalemli-Ozcan (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Koc University, Graduate School of Business ( email )

Rumelifeneri Yolu
34450 Sar?yer
Istanbul, 34450
Turkey

Elias Papaioannou

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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