Changes in the degree of international financial integration over the past three centuries

In the research reported in this paper I examine the degree of international financial market integration in all three of these episodes as well as during the two quite lengthy periods in between. To do so I use multi-country data for the near 300-year span of years from 1700 to 1998. The measure that I use to judge the degree of integration is the cross-country standard deviation of real interest rates. I compute these for both short-term and long-term interest rates for groups of countries that vary over time according to data availability. A major focus of this exercise is on the differences and the similarities in behavior across the various subperiods. A particularly important question here is how eighteenth century experience stacks up against the two later episodes. Another question has to do with the forces that operated in these three episodes, the most recent one in particular. I reach two conclusions. The first is that financial integration has been the rule rather than the exception over this long historical period. Major wars and the Great Depression of the 1930s intervened and temporarily arrested the process, but in each instance such interruptions proved to be transitory. The second has to do with the types of changes that have occurred in the integration process over time. In the main these appear to have involved a broadening of the 2 markets involved, in terms both of geographics and the number of assets involved. This latter issue is something that I am currently investigating.