Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/119482 
Year of Publication: 
2009
Series/Report no.: 
FINESS Working Paper No. D.1.4
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union.
Document Type: 
Working Paper

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