How Integrated are World Capital Markets? Some New Tests

Abstract

This paper presents some new emprcal EV] dence on tha extent of world capital-market ntegration.The first set of tests carrie out uses data from different countries to compare internationally expected marginal rates of substitution between consumption on i+4erent dates.If residents of different countries have access to a nominally risk-+ree bond denominated in dollars, say, their common expected marginal rate of substitution of future for present dollars should equal the gross nominal return on dollar bonds.Tests of the international equality of expected marginal substitution rates yield evidence conslster!t with a substantial degree of international capital-market integration after, but not before, 1973.These tests are naturally based on a carticular model of intertemporal consumption choice, but direct estimation of the inter-country relationships implied by that model lends support to its assumptions.These last findings are relevant to the current debate in macroeconomics about the role of interteinporal substitution.The second set of tests conducted in this paper concerns correlations oetween countries' saving and investment rates.For a sample of ten countries, correlations between annual changes in saving and investment rates over the period 1948-1984 look q.uite similar to those those found in quarterly data.Surprisingly, however, the correlation coefficients are often lower before the mid-1960s than afterward This finding throws further doubt on the interpretation of saving-investment correlation coefficients as structural parameters reflecting the reponse of domestic investment to shifts in national saving.

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