International Financial Integration*

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respect to more complex and riskier assets (ie portfolio equity and FDI), then we may
expect that cost-reducing steps have a larger impact on these components.

B. The Empirical Specification

In line with the discussion in the previous subsection, we attempt to empirically identify
the factors underlying the changing scale of international financial integration over time
and across countries. Given the lack of firm theoretical priors and the sparse prior
literature, this is intended to be an exploratory exercise.

We construct a panel data set for 18 OECD countries over 1978-2001 and consider
averaged data over six time periods: 1978-81, 1982-1985; 1986-1989; 1990-1993; 1994-
1997; and 1998-2001. The basic panel specification in Table 2 is

∆(IFIGDPit)=αi+γ*Xit+β*∆(Zit)+εit                 (3)

where we relate the growth in international financial integration to a set of country- and
time-varying determinants X_it,Z_it . We first difference the data to take into account the
non-stationarity of the levels of IFIGDP and some of the regressors.⁹ We allow for a
country-specific intercept, to allow for country-specific trends in the level of financial
integration. ¹⁰ Accordingly, we conduct fixed-effect least squares estimation (with White-
corrected standard errors).

We begin in Table 2 by examining IFIGDP . In Table 3, we restrict attention to the
volume of asset trade in portfolio equity and FDI (GEQGDP). Finally, in Table 4 we
examine the determinants of the composition of international balance sheets, as measured

⁹ That is, we look at the change in the average value of IFIGDP between 1978-81 and
1982-85.

¹⁰ We also tested for time fixed effects but these were jointly insignificant.

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