Balkan countries: Catching up and their integration in the European financial system

Abstract

This paper aims to illustrate the impact of financial variables on the process of convergence between selected European Union countries and the Balkan countries. Following a delay in the realization of structural changes resulting from the historical legacy and circumstances in which the transition process took place, Balkan countries began essential reforms in their financial systems at the end of 1990s. This included the adoption of concrete measures directed towards the growth and increase of the financial sector efficiency. Given this we use panel data over the period 1999-2007 for a sample of 21 countries, to test the convergence's hypothesis by the Bayesian iterative estimation method. Here two financial variables are introduced to control the differences in steady-state. Our empirical results sustain the importance of the domestic credit and the market capitalization in the catching-up process by a significant increase in the speed of convergence.