With a truly integrated and efficient world capital market, agents in different countries would face identical prices for particular assets and could pool risks to their lifetime consumption profiles, and new saving would flow to the most productive investment opportunities regardless of its origin. In Discussion Paper No. 902, Research Fellow Maurice Obstfeld evaluates the international capital market's performance by studying data on interest rate differentials, cross-country consumption correlations, international portfolio diversification and relations between national saving and domestic investment rates. Daily data on bid and ask rates for France, Germany, Italy and Japan indicate that deregulation and technological improvements have increased capital market integration since the early 1980s, but remaining gaps reflect actual or feared capital controls and other policies. Correlations among national growth rates of per capita consumption are far below the unity value consistent with full international sharing of consumption risks; this could reflect the existence of non-traded goods but probably reflects market failures associated with asymmetric information. Feldstein and Horioka's `savings retention coefficient', which measures the fraction of any exogenous increase in national saving that remains at home, remains high even for recent data; this suggests that savings are not free to flow to their most productive uses.

Obstfeld finds that most explanations of these data require further study and none appears likely to furnish a complete `solution'. Capital is quite mobile today in comparison with the classical gold standard era, but the available evidence on regional saving and investment within countries indicates low positive correlations between them. Political borders therefore appear to affect international capital movements, although the quantitative importance of actual or expected capital controls, national macroeconomic policies designed to target current account imbalances and regional investment preferences are not known. Obstfeld concludes that international capital flows have increased markedly over the last two decades, but they remain less free than intra-national flows, even among the industrial countries.

International Capital Mobility in the 1990s
Maurice Obstfeld

Discussion Paper No. 902, February 1994 (IM)