No. 809 - Convergence clubs, the euro area rank and the relationship between banking and real convergence

This paper analyses banking convergence, measured through the ratios of deposits and loans to GDP, across 65 countries, compares it with per capita income convergence, and tests its effect on real convergence. The focus of the paper is the group of countries that have adopted the euro as a single currency (euro area). It compares the degree of banking and real convergence among these countries with that reached by other 17 potential convergence clubs around the world (including the EU-27, the OECD, the G20, OPEC, and the Arab League). It employs a diversity of methods (ß- and s- analyses, stationarity tests, IV regressions) and finds three main results. First, the degree of convergence is higher within the clubs than in the entire sample, and it is diversified across the clubs. Second, all methodologies confirm euro-area banking convergence. Third, banking convergence has a positive and significant impact in fostering real convergence.