The Real Effects of Financial (Dis)Integration: A Multi-Country Equilibrium Analysis of Europe
53 Pages Posted: 9 Mar 2016 Last revised: 25 Oct 2016
Date Written: October 24, 2016
Using data from 15 European Union economies, we quantify the real effects of supply-side frictions due to the financial disintegration of European countries since the 2008 financial crisis. We develop a multi-country general equilibrium model with heterogeneous countries and destination-specific financial frictions. Financial institutions allocate capital endogenously across countries, determining the cost of capital to firms and the wealth of nations. The cost of financial disintegration is reduced access to capital for firms which results in lower output. Financial disintegration leads to a 0.54% fall in output in Europe since the crisis. We also estimate benefits of further financial integration.
Keywords: Financial Integration, Global Financial Crisis, Europe, Financial Institutions, Cross-border Financing
JEL Classification: E52, E61, F45, F62, F34, G10, G11, G12, G15, G21
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