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Comments on European Financial Integration ECB-CFS Research network

Comments on European Financial Integration ECB-CFS Research network. J.M. Campa IESE Business School, 13 February 2008. Goals of the papers. Same general goal: Measuring financial integration in Europe Same general conclusion:

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Comments on European Financial Integration ECB-CFS Research network

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  1. Comments on European Financial IntegrationECB-CFS Research network J.M. Campa IESE Business School, 13 February 2008 Campa-IESE

  2. Goals of the papers • Same general goal: • Measuring financial integration in Europe • Same general conclusion: • Integration has increased, but neither perfect integration nor as high as in other areas • Differences in approach emphasys and specifics Campa-IESE

  3. Ekinci, et al.: Financial Integration • Null hypothesis: • Integration: “diversification of ownership of capital” • Markets fully integrated – equal return to capital • Capital goes to highest return regions • Growth shocks correlated with higher output relative to income (capital income is diversfied) • Additional insights • Relationship with measures of social capital • Trust & credibility Campa-IESE

  4. Approach: • Country/region: • Measures of output and income are crucial • Persistence and speed of adjustment to growth shocks. • Empirical approach: • Timing: GDP growth 1991-94 explains output/income ratios 1996-2003 • Levels and first differences Campa-IESE

  5. Comments to integration approach • Key concept: net capital income flows • Measure: • Country level: GDP/GNI • Difference net capital income and net earnings of domestic residents • Regional level: personal income: income of households (could include transfers). • Missing: net government expenditure by region • Government net transfers in regions can be very large • Highly noisy measure of GDP/GNI Campa-IESE

  6. What is being tested? • Level regression: “development” finance • A particular model of convergence in growth opportunities with decreasing returns (Blanchard & Giavazzi…) • First differences: “diversification” finance • Not necessarily the same model, but what is the alternative? Not clearly specified • Shocks to growth lead to lower correlation between consumption and income Campa-IESE

  7. [Back] Relation GDP per capita – CA [Next] Campa-IESE

  8. [Back] Relation GDP per capita – CA Campa-IESE

  9. Additional insights: social capital • Measures of confidence and trust: • Noisy measures • (“Core confidence: police, Social Security & Major Companies”) • Somewhat surprising results (Fig.1 & 2) • Role in empirical model • Do they determine capital inflows or capital outflows? • Why should domestic residents be more likely to invest at home than foreigners? If not, outflows should remain the same. • Should it affect changes in capital stock invested or levels of capital stock? Campa-IESE

  10. Baltzer et al. • Evaluate degree of financial integration via: • Price convergence in: • Money markets • Bond markets • Consumer loans • Equity prices • Return based: common factors in price changes • Quantity/Portfolio flows • Debt • Equity Markets • Result: Convergence has increased for NMS Campa-IESE

  11. Result on Price Measures • High convergence in money markets, bonds and loan prices • Is convergence in price diferencials the same as financial integration? • What is the null hypothesis? • Is co-movement driven by financial integration or by real economic convergence? • Could there be too much convergence? • What about exchange rate risk? Campa-IESE

  12. Return based • The existence of common factors: • Is it convergence? • Is financial integration that is leading to convergence • What is the evidence on transaction costs? Campa-IESE

  13. But what prices indicate integration? Source: European Commission Campa-IESE

  14. Result on quantity measures: • Share increase in Europe external flows in debt instruments: • Patterns do not occur for U.S. nor UK • Shares do not increase for equity markets • What should be the relevant null hypothesis to test? • No integration? Full integration? • Time evolution of time shares • Actual shares of foreign investments –still too low? Campa-IESE

  15. There is large foreign ownership… • Banking integration, substantially larger in NMS • Providing increasing quantity integration • Are equity markets & debt markets substitute? • What should be the aggregate inference Campa-IESE

  16. Final Comments: • Nice papers, same goal, different approaches, same conclusion • Not absolute agreement on definition of financial integration • Convergence & integration are not the same • Same conclusion: financial integration/convergence appears to be increasing in Europe Campa-IESE

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