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Financial integration or financial fragmentation? A euro area perspective

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  • Arce-Alfaro, Gabriel
  • Blagov, Boris

Abstract

In this article we address the question of how strongly bank lending rates and credit volumes co-move across the euro area. Following the breakdown in the interest rate pass-through across the euro area, we aim to disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables by using a time-varying two-level dynamic factor model. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. Furthermore, we find persistent heterogeneity across member states, specifically those hit hard by the sovereign-debt crisis.

Suggested Citation

  • Arce-Alfaro, Gabriel & Blagov, Boris, 2022. "Financial integration or financial fragmentation? A euro area perspective," Economic Modelling, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:ecmode:v:114:y:2022:i:c:s0264999322001481
    DOI: 10.1016/j.econmod.2022.105902
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    References listed on IDEAS

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    Cited by:

    1. Garcia-Hiernaux, Alfredo & Gonzalez-Perez, Maria T. & Guerrero, David E., 2023. "Eurozone prices: A tale of convergence and divergence," Economic Modelling, Elsevier, vol. 126(C).
    2. Lukas Berend & Jan Pruser, 2024. "The Transmission of Monetary Policy via Common Cycles in the Euro Area," Papers 2410.05741, arXiv.org, revised Nov 2024.
    3. Kleimeier, Stefanie & Sander, Harald, 2022. "Twenty years with the Euro: Eurozone banking market integration revisited," Economic Modelling, Elsevier, vol. 114(C).

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    More about this item

    Keywords

    Co-movements; Financial fragmentation; Dynamic factor model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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