International Financial Integration*

International Financial Integration*

Philip R. Lane

Institute for International Integration Studies
and Economics Department, TCD; and CEPR

Gian Maria Milesi-Ferretti

International Monetary Fund and CEPR

This draft: January 9, 2003

Abstract

In recent decades, foreign assets and liabilities in advanced countries have
grown rapidly relative to GDP, with the increase in gross cross-holdings far
exceeding the size of net positions. Moreover, the portfolio equity and FDI
categories have grown in importance relative to international debt stocks. In this
paper, we describe the broad trends in international financial integration for a
sample of industrial countries, and seek to explain the cross-country and time-series
variation in the size of international balance sheets. We also examine the behavior of
the rates of return on foreign assets and liabilities, relating them to ‘market’ returns .

* Prepared for the IMF’s Third Annual Research Conference, November 7-8
2002. Mathias Hoffmann and Charles Larkin have provided helpful research
assistance. We thank Hélène Rey, Bob Flood, and our discussant Charles
Engel for insightful comments, Hali Edison for the data on stock market
capitalization, Michelle Hassine for countless clarifications on balance of
payments data, Ben Lockwood for the data on corporate tax rates, and Ladan
Mahboobi of the OECD for help with the privatization data. Lane's work on
this paper has been supported by the IIIS and is also part of a research network
on ‘The Analysis of International Capital Markets: Understanding Europe’s
Role in the Global Economy’, funded by the European Commission under the
Research Training Network Programme (Contract No. HPRN-CT-1999-
00067). Part of this paper was written while Lane was a visiting scholar in the
Research Department of the IMF.

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