The geography of asset trade and the euro: Insiders and outsiders

Abstract

Coeurdacier, Nicolas, and Martin, Philippe-The geography of asset trade and the euro: Insiders and outsidersThis paper analyzes the determinants of cross-border asset trade on cross-country data and a Swedish data set. We focus our analysis on the impact of the euro for the determinants of trade in bonds, equity and banking assets. With the help of a theoretical model, we disentangle the different effects that the euro may have on cross-border asset holdings for both euro zone countries and countries outside of the euro zone. We find evidence that the euro implies 1) a unilateral financial liberalization which makes it cheaper for all countries to buy euro zone assets. For bonds and equity holdings, this translates into approximately 14% and 17% lower transaction costs; 2) a preferential financial liberalization which on top of the previous effect lowers transaction costs inside the euro zone by approximately 17% and 10% for bonds and equity respectively; 3) a diversion effect due to the fact that lower transaction costs inside the euro zone entail euro countries to purchase less equity from outside the euro zone. Our empirical analysis also suggests that the elasticity of substitution between bonds inside the euro zone is three times higher than between bonds denominated in different currencies.

Estimating the effect of the EMU on current account balances: A synthetic control approach

“…Previous studies have investigated the effect of the EMU on a whole range of economic indicators, such as trade (Baldwin, 2006;Baldwin et al, 2008;Bun and Klaassen, 2007;Micco et al, 2003), foreign direct investment (De Sousa and Lochard, 2011;Petroulas, 2007), cross-border banking (Blank and Buch, 2007;Coeurdacier and Martin, 2009;Spiegel, 2009), real exchange rates (El-Shagi et al, 2016), GDP per capita (Fernández and Perea, 2015), and wage growth and unemployment (Grüner, 2010;Mikosch and Sturm, 2012). Mongelli and Vega (2006) provide an overview of the early literature on the effects of the EMU on economic performance, financial structures and product and labor market institutions.…”

Market standards in financial contracting: The Euro’s effect on debt securities

“…Using panel data from 1978 to 2007, Kalemli-Ozcan et al (2010) provide evidence that the elimination of exchange rate risk contributed the most to the increase in bank-to-bank debt holdings in the Euro area. The introduction of a common currency led investors from the EU and-to a lesser degree-from outside Europe to invest a greater share of their debt securities portfolios in the Euro area (Balli et al, 2010;Haselmann and Herwartz, 2010;De Santis and Gérard, 2009;Coeurdacier and Martin, 2009;Lane, 2006; see also Baele et al, 2004, pp. 521-522;Pagano and von Thadden, 2004, pp.…”

“…At a very general level, Coeurdacier and Martin (2009) analyze the effect of regulatory harmonization in the EU on cross-border investment by banks. Based on their model, they estimate legal differences-lack of standardization-to account for a 2.5% transaction cost.…”

How have global shocks impacted the real effective exchange rates of individual euro area countries since the euro’s creation?

“…Baldwin (2006)) and …nancial integration (e.g. Cappiello et al (2009) ;Coeurdacier and Martin (2009); DeSantis and Gerard (2009) ;Lane (2006)). Other recent papers have examined the divergences in current account balances within the euro area since the creation of the euro, their determinants and/or implications in the context of growing discussions on intra-euro area imbalances (see e.g.…”