Monetary and financial integration: evidence from Portuguese borrowing patterns

This paper examines the impact of European Monetary Union (EMU) accession on bilateral Portuguese international borrowing patterns. Using a difference-in-differences methodology, I demonstrate that Portugal’s accession to the EMU was accompanied by a change in its borrowing pattern in favor of borrowing from its EMU partner nations. This extends the evidence in the literature that overall international borrowing is facilitated by the creation of a monetary union, and raises the issue of financial diversion. The results are shown to survive a wide variety of robustness checks and are corroborated by preliminary evidence concerning Greece’s accession to EMU in 2001.