LÉONORE RAGUIDEAU-HANNOTIN

The case of financial and banking integration of Central, Eastern and South Eastern European countries: A gravity model approach

Léonore Raguideau-Hannotin

Abstract

The motivation of this article is to understand the determinants of banking integration of non-Euro CESEE EU Members. One stylized fact for these economies is the building up of external financial vulnerabilities since the beginning of the Transition period, with a large weight of cross-border banking, particularly with the European Union. In relation with the literature on the impact of gross financial flows on financial stability, we therefore estimate the long-term historical, geographical and cultural determinants of cross-border banking claims with a bilateral financial gravity model. We then analyze the impact of domestic (pull), foreign (push) and global factors using the gravity framework. Our results first show that cross-border banking in these economies is significantly driven by geographical proximity and common historical links, particularly with EU Member States. Second, we find that banking sector health variables are more significant as push factors, while structural banking system variables are more significant as pull factors. These results provide evidence in favor of an impact of European banking systems on financial liabilities in this region, in relation with the very high level of EU ownership of banking assets. Finally, US global liquidity factor matters more than exchange rate stability, which points towards policy dilemma effect in the region.

Mot(s) clé(s)

Gravity model, cross-border banking, Central Eastern and South Eastern European countries, European Union, push factors, pull factors, global factors, EU, CESEE

Monetary autonomy of CESEE countries and nominal convergence in EMU: a cointegration analysis with structural breaks

Léonore Raguideau-Hannotin

Abstract

This paper investigates the monetary autonomy of Central Eastern and South Eastern European countries with the Euro area. These countries are European Union Member States that have not adopted yet the Euro single currency. Despite high degree of convergence as measured by Maastricht criteria, four of them do no plan to enter the Euro area soon. We therefore assess monetary autonomy of these countries over the long run through the use of a multivariate cointegration methodology with structural breaks (Johansen et al., 2000). This methodology allows us to capture the multidimensional aspects of monetary autonomy in the context of nominal convergence in the Economic and Monetary Union, by including both domestic and Euro area variables into the system (policy rates, infation rates, exchange rate). It also enables us to exploit all information contained in the macroeconomic series of these countries, for which broken economic history translates into non-stationary time series with breaks. Our empirical results suggest that modelling structural breaks changes the number and/or nature of cointegrating relations between our variables compared to the standard error correction model without breaks. With this modelling, we find monetary policy spillover from the Euro area to Bulgaria, the Czech Republic, Hungary and Romania. The inclusion of Euro area inflation to our baseline model enriches the cointegrating relations for the Czech Republic and Bulgaria. Poland is found to be the most monetary-independent country of our
study across the various models estimated. On the other hand, Romania's monetary interdependence with Euro area is better modelled without taking into account any structural break.

Mot(s) clé(s)

Central Eastern and South Eastern European countries, Economic and Monetary Union, European Union, nominal convergence, monetary autonomy, structural breaks, cointegration, integration, CESEE, EU, EMU