Assessing the financial integration of Eastern European countries

The relationship between domestic saving and investment provides important insights for the integration of national financial markets into the world capital market. In case of perfect financial integration, it is generally assumed that there should be no close relationship between national saving and investment. The aim of this study is to measure the degree of financial integration by exploring the saving-investment nexus in Eastern European countries. We employ panel cointegration and causality tests for the annual time series covering the period of 2000-2016. Empirical results show that there is a strong causality between domestic saving and investment rate by indicating the low degree of financial integration of the Eastern European countries into the world capital market. This finding also implies that Eastern European countries are not attracting enough foreign resources that serve as a stimulant to domestic investment as well as economic growth. As a policy implication, it could be asserted that policy-makers should focus on financial reforms promoting financial integration processes in order to attract enough foreign resources for economic growth.