Financial Integration and Business Cycle Synchronization in the Expanded EU

摘要

Once the new member states (NMS) of the EU join the EMU, they give up the ability to conduct independent monetary policy, while deficit restrictions limit their ability to conduct fiscal policy. These restrictions increase the costs of joining a monetary union if individual business cycles are significantly different than the rest of the euro area. The very process of preparing to join the monetary union could, however, affect the similarity of shocks needed to be a successful monetary union. Previous studies find that increased trade integration can lead to greater synchronization. There are few studies, however, that explore the effect of financial integration on synchronization. There is no universal measure of financial integration, but one unique feature of the NMS that reflects financial integration with the euro area is euroization. Euroization is a byproduct of reductions in capital restrictions, EMU banks setting up more branches and subsidiaries in the NMS, and individual choices on risk by domestic agents. Since 2002, both the fraction of total deposits and foreign currency denominated deposits that are denominated in euro have increased for every NMS except Poland. There has also been an increase, though less pronounced, in the fraction of total loans and foreign currency denominated loans that are denominated in euro for most NMS (the exceptions are Hungary and Poland, where the Swiss franc dominates).