Free to Flow? New Results on Capital Mobility Amongst the Developed Countries

Abstract

This paper evaluates the evidence for uncovered and real interest parity at the long horizons for the non-G7 economies. We examine the behavior of exchange rates and interest differentials for bonds with 5-year maturity. Although there are substantial differences in the results among countries, the majority of the countries' interest differentials have correctly signed coefficients, which contrasts strongly with previous studies and provide empirical support for market integration. Similarly, test of real interest parity indicate a higher degree of equalization. In summary, we find greater evidence of capital and goods market integration than has been found using short term data, indicating that capital market integration has proceeded further even among the smaller developed economies.

Keywords: capital mobility, uncovered interest parity, real interest parity

JEL Classification: F21, F31, F42