The Integration of World Capital Markets

ByMorris Goldstein, Michael Mussa

December 1, 1993

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper discusses the extent to which national capital markets have become linked, and identifies several of the more important consequences of that increased degree of integration. Alternative approaches to the measurement of capital market integration are reviewed, including deviations from the law of one price, differences between actual and optimally diversified portfolios, correlations between domestic investment and domestic saving, and cross-country links in consumption behavior. Two recent episodes of large-scale international capital flows—namely, the turmoil in the European Monetary System in the fall of 1992, and the surge of capital inflows into Latin America during the last three years—are examined for insights into the workings of today’s global capital market. Finally, the paper offers some concluding remarks on the future development of international capital markets, on exchange rate management, on alternative approaches to living with larger and more influential financial markets, and on the financing of investment in the formerly centrally planned economies.

Subject: Balance of payments, Capital flows, Capital market integration, Capital markets, Currencies, Economic integration, Financial markets, International capital markets, Money, Securities

Keywords: bond issue, Capital flows, Capital market integration, Capital markets, Currencies, current account, Europe, financial system, foreign exchange, Global, goods market integration, interest rate, International capital markets, market correction, market discipline, market imperfection, market participant, market portfolio, monetary policy, nominal exchange rate, perfect capital market, rate of return, secondary market, Western Europe, WP, yen exchange market

Pages:
66
Volume:
1993
DOI:
---
Issue:
095
Series:
Working Paper No. 1993/095
Stock No:
WPIEA0951993
ISBN:
9781451950397
ISSN:
1018-5941

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Notes

The turmoil in the European Monetary System in the fall of 1992, and the surge of capital inflows into Latin America during the last three years, are examined.

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