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From Various Degrees of Trade to Various Degrees of Financial Integration: What do Interest Rates Have to Say?

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  • Adeline Bachellerie
  • Jérôme Héricourt
  • Valérie Mignon

Abstract

This paper proposes a systematic study of the degree of financial integration following the degree of trade integration according to Balassa’s (1961) classification, from preferential trading area to complete economic integration. To this end, we exploit all the information contained in interest rates and rely on the expectations hypothesis of the term structure of interest rates and real interest rate parity. These two conditions are empirically investigated on various regional trade agreements, using cointegration techniques by paying a special attention to potential breaks. Our results show that customs unions, corresponding to step 3 of the Balassa’s classification, seem to be a decisive threshold after which financial integration robustly takes place.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2009-01.

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Date of creation: Jan 2009
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Handle: RePEc:cii:cepidt:2009-01

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Keywords: FINANCIAL INTEGRATION; TRADE INTEGRATION; REGIONAL TRADE AGREEMENT; TERM STRUCTURE OF INTEREST RATES; REAL INTEREST RATE PARITY;

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  1. Soloaga, Isidro & Winters, L. Alan, 1999. "How has regionalism in the 1990s affected trade?," Policy Research Working Paper Series 2156, The World Bank.
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