International Financial Integration*

-6-

Nevertheless, heterogeneities in the data unavoidably remain—as we proceed, we point
out the implications of such data problems for our analysis.

B. Broad Trends

A summary volume-based measure of international financial integration is

where FA and FL refer to the stocks of aggregate foreign assets and liabilities,
respectively.² Figure 1 plots the evolution of this ratio over the period 1984-2001 for a set
of industrial countries. This ratio has increased by 250 percent over this period, with a
marked acceleration during the 1990s.³ This increase in financial linkages has not been
uniform across countries: Figure 2 shows a rise in dispersion in this ratio across countries
over this interval.

Since international trade in debt instruments may be driven by special factors, we also
consider an equity-based measure

( PEQA_ιt + FDIA_u + PEQLt + FDILt )
GDP

where PEQA (L) and FDIA (L) are the stocks of portfolio equity and FDI assets
(liabilities). In other words, GEQGDP is an indicator of the level of equity (portfolio and
FDI) cross-holdings. Figure 3 shows that the growth in this ratio has been even more rapid
than for IFIGDP—it more than tripled over 1983-2001.

² See also Lane (2000a) and Obstfeld and Taylor (2002). The latter discuss the relative
merits of this indicator versus other price-based measures of integration, as do Adam et al
(2002).

³ The decline during 2001 reflects the steep fall in world stock markets.

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