Multi-Country Empirical Investigation into International Financial Integration

Abstract

This paper focuses on the dynamics of international financial integration for a set of 13 industrial countries including Australia over the period 1990 to 2003 by analysing data on the level and composition of foreign assets and liabilities. The study provides insights into the broad trends on cross-country holdings and investigates the correlation of international asset positions with various ‘explanatory variables’ such as the degree of financial restrictions, the depth of financial markets, the openness to international trade, etc. The results show that the growth in goods trade and stock market capitalization are the main determinants of the growth in the scale of international balance sheets.

Key Words:

• International financial integration
• external assets and liabilities

JEL CLASSIFICATIONS:

• F31
• F32

Notes

1. The IIP is a central concept in international macroeconomics, since it lays out the international balance sheet of foreign assets and liabilities held by Australian residents.

2. The purpose of the CPIS is to improve statistics of holdings of portfolio investment assets, namely equity, long term debt, and short term debt. CPIS collects comprehensive information, with geographical detail on the country of residence of the issuer, on the stock of cross-border equities, long term bonds and notes, and short term debt instruments related to international investment position (IIP).

3. In 1992, an IMF Working Party on the Measurement of International Capital flows found that, at the world level, recorded portfolio liabilities far outweighed portfolio asserts by as much as $US400 billion.

4. The countries were Argentina, Australia, Austria, Belgium, Bermuda, Canada, Chile, Denmark, Finland, France, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Thailand, the United Kingdom, the United States, and Venezuela.

5. IMF (2000) Results of the 1997 Coordinated Portfolio Investment Survey (Washington, DC: IMF).

6. IMF (2003) Portfolio Investment: Coordinated Portfolio Investment Survey (CPIS): Metadata (Washington, DC: IMF).

7. Engel (2003) suggests that ‘If we were building an economic model in which depth of equity markets were going to explain something about external holdings, I would guess that the variable we would end up trying to explain is foreign equity holdings as a fraction of total market capitalization. So what might be especially useful are regressions that have foreign equity liabilities divided by stock market capitalization as the dependent variable.’