Financial Integration, GDP Correlation and the Endogeneity of Optimum Currency Areas
37 Pages Posted: 25 Apr 2005
Date Written: April 2005
Abstract
The paper analyzes the relationship between trade, financial integration and business cycle synchronization in the euro area. The introduction of the euro has had a noticeable impact on European financial markets: we find evidence that capital markets integration exerts a positive effect on output correlation. This in turn has two major implications. First, it corroborates the hypothesis of the endogeneity of optimum currency areas, whereby after joining a monetary union countries fit better standard OCA criteria; second, it provides European policymakers with yet another reason to purse financial integration in the euro area (and in prospective members as well).
Keywords: OCA, EMU, financial integration, GDP correlation
JEL Classification: F15, F36
Suggested Citation: Suggested Citation
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