## The Integration of World Capital Markets

_IMF Working Papers, December 1, 1993_

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**Canonical URL:** [The Integration of World Capital Markets](https://www.imf.org/en/publications/wp/issues/2016/12/30/the-integration-of-world-capital-markets-1161)

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## Bibliographic details
- Authors: Morris Goldstein, Michael Mussa
- Published: December 1, 1993
- Series: IMF Working Papers

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### Scope and objectives
- Discusses the extent to which national capital markets have become linked and identifies several important consequences of increased integration.
- Reviews alternative approaches to the measurement of capital market integration, including:
  - deviations from the law of one price,
  - differences between actual and optimally diversified portfolios,
  - correlations between domestic investment and domestic saving,
  - cross-country links in consumption behavior.
- Examines two recent episodes of large-scale international capital flows for insights into global capital market workings:
  - the turmoil in the European Monetary System in the fall of 1992,
  - the surge of capital inflows into Latin America during the last three years.

### Key findings and analytical themes
- Capital market integration has multiple measurable dimensions; no single metric suffices. The paper emphasizes complementary measures:
  - law of one price deviations as indicators of asset price convergence or segmentation,
  - portfolio diversification gaps to assess cross-border investment barriers or preferences,
  - investment–saving correlations to evaluate international capital mobility,
  - consumption links to capture cross-country risk-sharing and financial market completeness.
- Case studies provide empirical and institutional lessons:
  - European Monetary System turmoil (fall of 1992) illustrates how integrated markets transmit shocks and affect exchange rate dynamics.
  - Latin American capital inflows (surge during the last three years) illuminate the macroeconomic and policy challenges posed by large-scale international capital movements.
- Concluding analytical remarks address:
  - future development of international capital markets,
  - implications for exchange rate management,
  - alternative approaches to living with larger and more influential financial markets,
  - financing of investment in the formerly centrally planned economies.

### Policy implications and recommendations
- Exchange rate management: integration increases the transmission of external shocks, implying greater exchange-rate policy considerations in an integrated capital market environment.
- Market-based discipline and regulation: larger, more influential financial markets require policy frameworks that acknowledge cross-border linkages and potential for rapid capital flow reversals.
- Investment financing for transition economies: as formerly centrally planned economies engage with global capital markets, policy attention to appropriate financing instruments and market development is necessary.
- No single policy prescription is offered; the paper sketches alternative approaches to managing the risks and opportunities from deeper international capital market integration.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/the-integration-of-world-capital-markets-1161_