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Heterogeneity, co-movements and financial fragmentation within the euro area

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  • Arce-Alfaro, Gabriel
  • Blagov, Boris

Abstract

In this article we analyse the degree of commonality across euro area countries in the bank lending rates and credit volumes. Using a time-varying two-level dynamic factor model, we disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables. 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. There is heterogeneity across member states, specifically those hit hard by the crisis. We observe high commonality in the financial variables, which increases in periods of high financial volatility.

Suggested Citation

  • Arce-Alfaro, Gabriel & Blagov, Boris, 2021. "Heterogeneity, co-movements and financial fragmentation within the euro area," Ruhr Economic Papers 927, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:927
    DOI: 10.4419/96973085
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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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