Abstract
This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Precisely, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so evident in the peripheral, where the financial and sovereign crises have had a more substantial impact. In addition, our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some flaws that remain unsolved.
Highlights
The free movement of capital in the European Union (EU) is one of the fundamental economic freedoms established in the founding treaties
The groupings are determined endogenously relying on the breaks found and signal a clear difference between core countries and the rest of the sample; fifth, we present robustness checks using in a complementary way both Mean Group (MG)/Pooled Mean Group (PMG) estimators4 and rolling window regressions
For the quarterly data (1995-2019), CEE countries are included and they show particular features in the financial integration process reflected in common break points that differ from older member countries, either core or peripheral
Summary
The free movement of capital in the European Union (EU) is one of the fundamental economic freedoms established in the founding treaties. European capital markets should be as integrated and developed as possible, as in the context of a monetary union, the failure to achieve it may have serious consequences. Home bias, measured as the holding of domestic assets versus their optimal intra-EU allocation, relates to the quantity approach to financial integration (Feldstein and Horioka 1980). This should be closely monitored, as a high home bias may amplify output shocks during the financial crisis (Furceri and Zdzienicka 2013). In the same vein, Obstfeld and Rogoff (2000) developed a model with transaction costs for international trade in goods, finding that the sole existence of frictions in the goods markets might prevent capital mobility across countries. Ford and Horioka (2017) maintain that financial markets integration is not
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