Capital mobility in developing countries : some measurement issues and empirical estimates
An economy's financial integration with the outside world (the extent of capital mobility across its borders) is a key determinant of some of its most important macroeconomic properties. Yet little is known about this characteristic of many developing economies. An important stumbling block in the empirical assessment of financial integration (openness) is the many approaches to measuring it. The author describes and evaluates different tests of capital mobility, surveys existing evidence, and applies four tests of capital mobility - to assess the degree to which the many developing countries tested have achieved integration with the world financial markets. The four tests are the: (1) magnitude of gross capital flows; (2) uncovered interest rate parity; (3) strength of saving-investment correlations; and (4) behavior of domestic consumption over time. The evidence suggests that most developing countries can be considered to be financially open - in only 18 of the 57 developing countries classified did the data fail to show financial openness - and that many countries may be experiencing an increased degree of integration with world financial markets.
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