CRIF Working Paper No. 02002

Has International Finance Integration Increased?

Title: Has International Finance Integration Increased?

Authors: Lawrence G. Goldberg (University of Miami)

              James R. Lothian (Fordham University)

              John Okunev (Principle Financial Group, Sydney, Australia)

Contact: lothian@fordham.edu

Keywords: Financial integration, interest-rate equalization, real interest rates.

JEL Classification: F36, E40

Abstract: This paper compares the behavior of real interest rate differentials across the major countries under the Bretton Woods regime and the regime of floating exchanges that replaced it. The primary object is to investigate both the extent of market integration and its changes over time. For all fifteen possible country pairs real interest differential are mean reverting, and in two-thirds of these cases indistinguishable from zero statistically. For all country pairs on average and for most such pairs individually, moreover, the estimated differentials are not appreciably different in absolute values than the differentials that we estimate for various money-market rates within the United States. Additional evidence points to a narrowing of differentials under floating rates over time and an increase in speeds of convergence.

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