Comments on European Financial Integration ECBCFS Research network

1
Comments on European Financial IntegrationECB-CFS
Research network

• J.M. Campa
• IESE Business School,
• 13 February 2008

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

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

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

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

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

7
Back Relation GDP per capita CA
Next
8
Back Relation GDP per capita CA
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?

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

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?

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?

13
But what prices indicate integration?
Source European Commission
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?

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

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