Non-Linear Growth Effects of Financial Development: Does Financial Integration Matter?

23 Pages Posted: 2 Mar 2007 Last revised: 15 Jan 2008

See all articles by Igor Masten

Igor Masten

University of Ljubljana - Faculty of Economics

Fabrizio Coricelli

Université Paris I Panthéon-Sorbonne; Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR)

Arjana Brezigar Masten

Institute for Macroeconomic Analysis and Development

Date Written: September 1, 2007

Abstract

Using both macro and industry-level data this paper analyses the nonlinear effects of financial development and international financial integration on economic growth in Europe. Special attention is devoted to modeling threshold effects with respect to the depth of financial markets as a measure of economies' absorption capacity. Results reveal evidence of significant non-linear effects, with less developed European countries gaining more from financial development. In contrast, benefits of international financial integration become significant at higher levels of financial development. The data show that monetary integration in Europe significantly contributed to a higher degree of financial integration. Entry of new EU members to the European Monetary Union may thus be the mechanism ensuring a virtuous development circle, as the adoption of the Euro may allow the development of domestic financial markets and financial integration to go hand-in-hand.

Keywords: Euro adoption, financial integration, financial development, threshold effects, economic growth

JEL Classification: F33, F36, G15

Suggested Citation

Masten, Igor and Coricelli, Fabrizio and Brezigar Masten, Arjana, Non-Linear Growth Effects of Financial Development: Does Financial Integration Matter? (September 1, 2007). Available at SSRN: https://ssrn.com/abstract=967633 or http://dx.doi.org/10.2139/ssrn.967633

Igor Masten (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Fabrizio Coricelli

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

Paris School of Economics (PSE)

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Arjana Brezigar Masten

Institute for Macroeconomic Analysis and Development ( email )

Gregorciceva 27
Ljubljana
Slovenia

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