A Provincial View of Capital Mobility

This paper develops a method of testing for zones of financial integration based upon intertemporal considerations and applies it to data on Canadian provincial trade. In a financially-integrated region individuals smooth consumption with respect to movements in aggregate income. Consumption in that region follows income in that region if individuals use only regional capital markets while consumption follows movements in income in broader regions (e.g. national income or world income) if individuals have access to and use capital markets in those broader regions (e.g. the national or global capital markets, respectively). We derive a specification which measures the impact of differential levels of access to capital markets--different zones of capital mobility--on the relationship between the regional trade balance and regional, national and global income. This empirical specification is tested using data on trade balances across Canadian provinces. The results indicate full capital mobility within Canada but only partial capital mobility between Canada and the rest of the world.