| Description |
The international integration of capital markets has transformed the world political economy. Utilizing the literature in several disciplines, this paper addresses the question of what are the economic and political requirements for maximizing the benefits and minimizing the costs of international capital market integration. After examining the history of the international monetary system and the emergence of the first truly global capital market, this paper defines what is meant by the term integration, provides measures for the degree of international capital market integration, and then assesses how integrated these markets are today. Then, the costs and benefits of integration are discussed. The benefits of integration are defined in terms of efficiency and welfare. The costs are identified as increased market instability, increased risk, and weakened macroeconomic policy instruments. International policy cooperation is examined as the means by which the costs of integration can be managed and the benefits increased. The conclusion states that the net benefits of international capital market integration will only be maximized when the highest degree of policy cooperation, perfect policy integration, is achieved. When this occurs, the economic requirements for maximizing net benefits, the Feldstein-Horioka condition and real interest rate parity, can be met. |
