An analysis of structural change dynamics in capital mobility and financial market integration in development process: A comparative approach

One of the most striking developments in the world economy since the 1970s has been the increasing degree of financial integration in the both developed and developing economies, as constraint to the movement of financial capital have been gradually relaxed and in many cases fully abolished. With the widespread removal of regulations and closer integration of international financial markets, global movements of capital and financial market integration have become increasingly linked. The main objective of this doctorate thesis is to examine the degree of capital mobility and financial market integration for selected OECD and non OECD countries, because the degree of capital mobility and financial integration has important implications for policy-makers and international investors. This is achieved in two steps. In the first step, Feldstein-Horioka and Jansen error correction model are estimated to examine the degree of capital mobility using recent time series and panel data techniques for the period 1960-2008. The empirical results of individual time series estimation for many of the countries and panel data for all the countries under consideration suggest that saving and investment are not cointegrated, indicating capital mobility. Furthermore, some control variables (e.g. openness, population dependency ratio, GDP per capita, country size, current account balance) that considered to affect saving and investment relation are utilized in panel threshold regression estimation. In the second step, real interest parity (RIP) condition, a cornerstone assessing the financial market integration, is examined for selected countries. The real interest parity (RIP) condition combines two main pillars in international finance: uncovered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation from RIP is therefore an indicator of the lack of financial market integration. This thesis investigates whether RIP among selected countries hold or not over the period 1974:Q1?2008:Q4. This is done by carrying out a set of unit root tests, which includes both traditional unit root tests with structural breaks and nonlinear unit root tests on the real interest differentials with respect to USA and Germany. The main contribution of this thesis is with respect to the econometric approach we employ. We consider whether or not adjustments towards RIP are nonlinear. The empirical results reveal a high degree of market integration among the countries under consideration especially with nonlinear unit root tests and indicate that there is evidence in favor of RIP.