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What Lies Beneath The Euro's Effect On Financial Integration: Currency Risk, Legal Harmonization, Or Trade?

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Executive Summary

Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. The authors investigate the underlying channels of the euro's effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. They also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. They find that the euro's impact on financial integration is primarily driven by eliminating the currency risk.

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