The fundamental determinants of financial integration in the European Union

This paper focuses on the fundamental determinants of the degree of financial integration in the European Union over the period 1974-1993. Using closed interest rate differentials to measure the intensity of capital controls and applying a pooled cross-section time-series approach, the authors find realized inflation, government instability and gross fixed capital formation to have a strong and significantly positive effect on the intensity of capital export controls. In addition, they expect the influence of economic and financial market structure on closed interest rate differentials to increase in the future.