Financial Integration in Europe Through the Lens of Composite Indicators

35 Pages Posted: 2 May 2019

See all articles by Peter Hoffmann

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Manfred Kremer

European Central Bank (ECB)

Sonia Zaharia

Tufts University - Friedman School of Nutrition Science and Policy

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2019

Abstract

This paper develops composite indicators of financial integration within the euro area for both price-based and quantity-based indicators covering money, bond, equity and banking markets. Prior to aggregation, individual integration indicators are harmonised by applying the probability integral transform. We find that financial integration in Europe increased steadily between 1995 and 2007. The subprime mortgage crisis marked a turning point, bringing about a marked drop in both composite indicators. This fragmentation trend reversed when the European banking union and the ECB's Outright Monetary Transactions Programme were announced in 2012, with financial integration recovering more strongly when measured by price-based indicators. In a growth regression framework, we find that higher financial integration can be associated with an increase in per capita real GDP growth in euro area countries. In times of high financial stress, however, such a positive correlation between financial integration and growth seems to break down.

Keywords: composite indicator, economic growth, European Monetary Union, financial integration, financial stress

JEL Classification: F36, F43, F45, G01, G15

Suggested Citation

Hoffmann, Peter and Kremer, Manfred and Zaharia, Sonia, Financial Integration in Europe Through the Lens of Composite Indicators (April 2, 2019). Available at SSRN: https://ssrn.com/abstract=3364827 or http://dx.doi.org/10.2139/ssrn.3364827

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Manfred Kremer (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7065 (Phone)

Sonia Zaharia

Tufts University - Friedman School of Nutrition Science and Policy ( email )

150 Harrison Avenue
Boston, MA 02111
United States

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