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The fundamental determinants of financial integration in the European Union

By J.J.G. Lemmen and S.C.W. Eijffinger

Abstract

This paper focuses on the fundamental determinants of the degree of financial integration in the European Union over the period 1973-1993. Using closed interest differentials to measure the intensity of capital controls and applying a panel data approach, we find realized inflation rates, government deficits, current account deficits and credits to the domestic economy to be significantly positively correlated with the intensity of capital export restrictions. In addition, low productivity in the business sector and low availability of sophisticated deposit instruments are positively related to the intensity of capital export controls. Consequently, remaining differences in national economic and financial structures, should be of greater interest to policymakers.Control;EU;Financial Integration;monetary economics

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