erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Evaluating Capital mobility in the EU: A New Approach Using Swaps Data

Isabel Vieira (Universidade de Évora, Portugal)

Abstract

The level of capital mobility prevailing in the 90s within a group of European Union countries - Belgium, France, Germany, Italy, the Netherlands and the United Kingdom - is evaluated by means of cointegration-based tests of the covered interest parity condition. Unlike other similar studies, this one concentrates on the long end of the maturity spectrum, investigating onshore and offshore assets with maturities of three, five, seven and ten years, and employing swaps data as a means of covering foreign exchange risk. Although such an assessment has not been previously developed, it has practical interest in the context of European economies. In fact, given member states’ lack of autonomy over domestic monetary and fiscal policies, the sluggishness of salaries and prices, and the low mobility of European labour force, financial markets may become one major source of adjustment to asymmetric shocks. To this end, it is the mobility of long-term capital, rather than that of short-term one, that is of critical importance. This analysis suggests that long-term financial flows appear to be completely unrestrained only between domestic Dutch and German markets. Consequently, some countries may, in the future, face difficulties in attracting capital for purposes of long-run stabilisation, even in the absence of foreign exchange risk.

Economic Research Center
Middle East Technical University
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