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On the Global Financial Market Integration “Swoosh” and the Trilemma

Geert Bekaert () and Arnaud Mehl ()

No 23124, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance.

JEL-codes: F15 F21 F30 F36 F38 F41 F6 G15 N2 (search for similar items in EconPapers)
Date: 2017-02
New Economics Papers: this item is included in nep-cba, nep-his, nep-mon and nep-opm
Note: AP IFM
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Published as Geert Bekaert & Arnaud Mehl, 2019. "On the Global Financial Market Integration “Swoosh” and the Trilemma," Journal of International Money and Finance, .

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