DP8137 Financial Integration and Growth - Is Emerging Europe Different?

Author(s): Christian Friedrich, Isabel Schnabel, Jeromin Zettelmeyer
Publication Date: December 2010
Keyword(s): Economic growth, European transition economies, Financial integration, Parent banking, Political integration
JEL(s): F32, F36, G21, O16
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8137

Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyze several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the EU. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.