Has international financial integration increased

This paper compares the behavior of real interest rate differentials across the major countries under the Bretton Woods regime and the regime of floating exchanges that replaced it. The primary object is to investigate both the extent of market integration and its changes over time. For all fifteen possible country pairs real interest differentials are mean reverting, and in two-thirds of these cases indistinguishable from zero statistically. For all country pairs on average and for most such pairs individually, moreover, the estimated differentials are not appreciably different in absolute value than the differentials that we estimate for various money-market rates within the United States. Additional evidence points to a narrowing of differentials under floating rates over time and an increase in speeds of convergence. The rate of interest plays a central role in two great branches of economic science,—the theory of prices, and the theory of distribution. The role of the rate of interest in the theory of prices applies to the determination of the prices of wealth, property, and services. Irving Fisher (1907, p. 225)