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International financial integration: Measurement and policy implications

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  • Colm Kearney

Abstract

This paper overviews work on the definition, measurement and implications of international financial integration. It first reviews the international parity relationships and three measures of the degree of international financial integration: namely, the savings‐investment correlation measure, the equalization of rates of return measure and the international capital market completeness measure. It points to the benefits of free international mobility of financial assets, including the facilitation of obtaining the gains from commodity and services trade, reducing risk, enabling the financing of high return investments and smoothing international consumption. It also points out the side effects including the relative effectiveness of alternative stabilization policies and their effects on savings and income distribution through their effects on the tax system. It concludes that free capital mobility is not a primal source of economic instability and policies aimed at restricting the free international mobility of financial capital may be difficult to implement and carry the risk of inducing firms to manage their international risks by reducing their exposures caused by international trade.

Suggested Citation

  • Colm Kearney, 1996. "International financial integration: Measurement and policy implications," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 1(3), pages 347-364.
    • Handle: RePEc:taf:rjapxx:v:1:y:1996:i:3:p:347-364
    DOI: 10.1080/13547869608724596
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    Cited by:

    1. Herrmann, Sabine & Jochem, Axel, 2003. "Die internationale Intregration der Devisenmärkte in den mittel- und osteuropäischen Beitrittsländern: Spekulative Effizienz, Transaktionskosten und Wechselkursprämien," Discussion Paper Series 1: Economic Studies 2003,08, Deutsche Bundesbank.
    2. Barari, Mahua, 2004. "Equity market integration in Latin America: A time-varying integration score analysis," International Review of Financial Analysis, Elsevier, vol. 13(5), pages 649-668.
    3. Gregory Birg & Brian M. Lucey, 2006. "Integration of smaller European equity markets: a time-varying integration score analysis," Applied Financial Economics Letters, Taylor & Francis Journals, vol. 2(6), pages 395-400.
    4. Jochem, Axel & Herrmann, Sabine, 2003. "The international integration of money markets in the central and east European accession countries: deviations from covered interest parity, capital controls and inefficiencies in the financial secto," Discussion Paper Series 1: Economic Studies 2003,07, Deutsche Bundesbank.
    5. Herrmann, Sabine & Jochem, Axel, 2003. "Die internationale Integration der Geldmärkte in den mittel- und osteuropäischen Beitrittsländern: Abweichungen von der gedeckten Zinsparität, Kapitalverkehrskontrollen und Ineffizienzen des Finanzsek," Discussion Paper Series 1: Economic Studies 2003,07, Deutsche Bundesbank.

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