Financial integration in the European Union: Measurement and determination

The first part of this study addresses the measurement of financial integration in the European Union (EU). First, we present empirical evidence on the degree of financial integration as measured with interest parity conditions. Second, the study applies an error-correction model of saving-investment correlations to assess the degree of financial integration. Third, we examine the relationship between returns on financial assets and consumption growth rates across countries to test for the degree of financial integration. The second part of the study considers the determinants of financial integration and the incidence of nonresident interest withholding taxation. Particularly, we discuss relevant measures of the intensity of capital controls and go into the underlying determinants of the intensity of capital controls in the EU. Finally, we are concerned with the incidence of nonresident interest withholding taxes in the international 3-month Treasury bill market and the international 5-year government debt market.