A principal components analysis of international financial integration under fixed and floating exchange rate regimes

Abstract

This paper presents an application of factor analytic techniques, employing principal components analysis, to determine to what extent international financial integration has been enhanced as a result of the move to a floating exchange rate regime by the major industrialized countries in the early 1970s. While several alternative, though related definitions exist, financial integration is viewed here as the extent to which the levels or changes in interest rates in different financial centers move in harmony. The results suggest that there has not been a marked increase in scope for countries to pursue independent interest rate policies since 1973, though Germany would seem to be an exception to this general observation.