We analyse income convergence among the EU28 countries throughout 1995–2017 and the relationship with the convergence patterns of EU financial systems. We apply the nonlinear latent factor model of Phillips and Sul (2007, 2009) to real incomes and the IMF financial development indices for financial markets and financial institutions (Svirydzenka, 2016), and identify convergence clubs endogenously. We have several results. First, income disparities narrowed significantly over the last twenty years; yet, the growth convergence process lost momentum triggered by the global financial crisis and countries legacies shaped up asymmetries that have crystallised. Second, countries' financial systems exhibit high fragmentation, especially for financial markets, with the new EU member states at a lower financial development, confirming the existence of a two-tier Europe. Overall, the convergence patterns for real incomes and financial development are strongly correlated. Finally, the financial structure matters and market-oriented economies feature higher long-run growth, indicating the need to implement pan-European policy actions that increase the opportunities of risk diversification, enhance capital raising and channel large-scale financing to firms.

Real income convergence and the patterns of financial integration in the EU / Cavallaro, E.; Villani, I. - In: THE NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE. - ISSN 1062-9408. - 56:(2021). [10.1016/j.najef.2020.101337]

Real income convergence and the patterns of financial integration in the EU

Cavallaro, E.
Primo
;
Villani, I
Secondo
2021

Abstract

We analyse income convergence among the EU28 countries throughout 1995–2017 and the relationship with the convergence patterns of EU financial systems. We apply the nonlinear latent factor model of Phillips and Sul (2007, 2009) to real incomes and the IMF financial development indices for financial markets and financial institutions (Svirydzenka, 2016), and identify convergence clubs endogenously. We have several results. First, income disparities narrowed significantly over the last twenty years; yet, the growth convergence process lost momentum triggered by the global financial crisis and countries legacies shaped up asymmetries that have crystallised. Second, countries' financial systems exhibit high fragmentation, especially for financial markets, with the new EU member states at a lower financial development, confirming the existence of a two-tier Europe. Overall, the convergence patterns for real incomes and financial development are strongly correlated. Finally, the financial structure matters and market-oriented economies feature higher long-run growth, indicating the need to implement pan-European policy actions that increase the opportunities of risk diversification, enhance capital raising and channel large-scale financing to firms.
2021
economic growth; financial development; financial resilience; convergence; clustering approach
01 Pubblicazione su rivista::01a Articolo in rivista
Real income convergence and the patterns of financial integration in the EU / Cavallaro, E.; Villani, I. - In: THE NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE. - ISSN 1062-9408. - 56:(2021). [10.1016/j.najef.2020.101337]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/1468723
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