The collateral effects of political integration on credit growth in the new member states of the EU

Since 2009, low interest rates have been associated with increases in credit growth and overheating pressure in many emerging markets. In the new member states (NMS) of the European Union (EU), however, domestic lending contracted along with a shrinkage in cross-border financial inflows. In this paper, I investigate whether political integration with the EU has strengthened the relation between domestic credit growth and international financial inflows in the NMS in comparison to other emerging markets. Taking into account the period 2008-2014 and the boom period in the run-up to the 2008 crisis, I provide empirical evidence that domestic lending in both periods is more responsive to changes in cross-border bank lending if a country is a member of the EU. The paper's finding lends support to studies suggesting that political integration has collateral effects on emerging markets via financial integration.