ABSTRACT

A larger financial market facilitates financial innovation and competition, which enhances risk sharing and efficient allocation of capital to investment opportunities. These effects, together with the benefits of deeper and more liquid financial markets, should also enhance economic growth. A notion of financial integration, which also underlies much of the policy discussion, is a situation where there are no barriers that discriminate economic agents on the basis of their location in their access to funds and investment of capital. The law-of-one-price and, consequently, price-based indicators of integration should be used as far as possible as they provide the strongest and most clear-cut evidence of integration. In money and government bond markets, assets are often sufficiently comparable to permit the measurement of price differences directly as an indicator of the degree of integration. Technological changes in the financial industry, in particular the spread and use of remote access options to financial services can provide indications of integration.