By allowing countries to borrow and lend money efficiently, capital markets can provide the same services across countries that they provide within a single economy, allowing more efficient use of funds for investment and improving the allocation of consumption over time. While the potential gains from open international capital markets are clear, measuring the actual level of international capital mobility has proved to be more difficult. Among the main measures used in the literature are comparisons of onshore-offshore nominal interest rates and the correlation of saving and investment rates across countries. Tests involving nominal interest comparisons generally indicate a high degree of capital mobility, while those involving real rates and savings-investment relationships show relatively low levels.
This uncertainty has revived interest in alternative measures of the openness of international capital markets. One promising avenue involves using consumption patterns across countries as a measure of capital mobility. The logic behind the test is that, if capital markets are integrated, consumers will be able to insulate themselves against idiosyncratic disturbances. Hence consumption across individual countries should be highly correlated with the path of the aggregate across all countries. This paper extends this work on international consumption patterns. As well as looking at a larger set of countries, a somewhat different estimating equation is derived that takes explicit account of the possibility that part of local consumption depends upon local income.
The paper finds that Japan is the only industrial country in the sample for which national consumption appears to be fully integrated with the rest of the world. For the other countries considered, however, the source of the failure varies. Within the EC, with the notable exception of the United Kingdom, the failure is almost universally associated with incomplete integration across individual national capital markets. Greater integration of national capital markets caused by moves toward a single market and, possibly, a single currency, could therefore provide potentially significant gains in economic welfare by improving consumption patterns across the region. In the rest of the sample, national capital markets appear to be integrated. However, except in the case of Japan, consumption is disrupted from its optimum path by incomplete access of individuals to these national capital markets.