International Financial Integration*

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We add TRADE to the specification in columns (2)-(7): it is positive and highly significant
throughout, and it improves the overall explanatory power substantially. The average
TRADE coefficient of 3.7 in columns (2)-(7) indicates a strongly leveraged association: a
10 percentage point increase in the trade to GDP ratio is associated with a 37 percentage
point increase in IFIGDP.

In columns (3)-(7), we add GDP per capita to the set of regressors. It enters positively and
is highly significant across the specifications: a one percent increase in GDP
raises IFIGDP by 2.5 percentage points on average.

We add FINDEPTH and STKCAP to the set of regressors in columns (4)-(7). The point
estimate for FINDEPTH is always positive and is marginally significant in column (7),
while STKCAP is quite important throughout: there is a strong positive correlation
between an open capital account and a large domestic stock market. The overall
explanatory power of the specification rises to 0.69 once these variables are included. In
part, of course, there is a mechanical relation in that rising stock market indices increase
both STKCAP value and the value of foreign equity liabilities in IFIGDP.

The cumulative privatization variable actually enters with a negative sign in columns (5)-
(7), and is significant in the latter two regressions. This suggests that privatization may
actually lead to a substitution away from foreign assets, which is especially plausible if the
privatization process favors domestic investors.

The TAXRATE variable is included in columns (6)-(7), at the cost of a reduction in the
number of observations. It turns out to be unimportant in explaining variation in the level
of international financial integration. In addition, the PROTECTION variable is not
significant in column (7).

We turn to the measure of cross-border equity holdings GEQGDP in Table 3. These are an
increasingly important component of total international financial holdings, with their

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