Working Paper: NBER ID: w23124
Authors: Geert Bekaert; Arnaud Mehl
Abstract: We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance.
Keywords: Financial Market Integration; Trilemma; Globalization
JEL Codes: F15; F21; F30; F36; F38; F41; G15; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| de jure capital account openness (F32) | de facto financial market integration (F30) |
| global growth uncertainty (F69) | de facto financial market integration (F30) |
| de facto financial market integration (F30) | temporal pattern of financial market integration (F30) |
| base country interest rates (E43) | domestic interest rates (E43) |