Monetary and Financial Integration in the EMU: Push or Pull?

Abstract

AbstractThis paper examines the channels through which monetary union increased financial integration, using panel data on bilateral international commercial bank claims from 1998–2006. I decompose the increase in claims into three channels: a “borrower effect,” as a country's EMU membership may leave its borrowers more creditworthy in the eyes of foreign lenders; a “creditor effect,” as membership in a monetary union may increase the attractiveness of a nation's commercial banks as intermediaries, perhaps through increased scale economies or through an improved regulatory environment after the advent of monetary union; and a “pairwise effect,” as joint membership in a monetary union increases the quality of intermediation between borrowers and creditors when both are in the union. Isolating these three channels through a series of difference‐in‐differences specifications, I find that the pairwise effect is the primary source of increased financial integration. This result is robust to a number of sensitivity exercises.