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Ruhr Economic Papers #927


Gabriel Arce Alfaro, Boris Blagov

Heterogeneity, co-movements, and financial fragmentation within the Euro Area

In this article we analyse the degree of commonality across euro area countries in the bank lending rates and credit volumes. Using a time-varying two-level dynamic factor model, we disentangle the relative importance of country-specific and common components in explaining the variance of the macro and financial variables. Our results show that a high share is explained by the common component. However, we find a persistent decline in the importance of the common factor in the bank lending rates, indicating the presence of financial fragmentation. There is heterogeneity across member states, specifically those hit hard by the crisis. We observe high commonality in the financial variables, which increases in periods of high financial volatility.

ISBN: 978-3-96973-085-0

JEL-Klassifikation: C11, C38, E43, E52

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