Financial and Real Integration

Scott L. Baier and Gerald P. Dwyer Jr.
Working Paper 2008-14
May 2008

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We examine the relationship between real and financial integration. Real integration is measured by productivities of capital and labor from trade data for 1982 to 1997. Financial integration is measured by the black market exchange rate. We find more evidence of convergence to equality for returns to capital than for returns to labor. There is some support for associating the convergence of black market premia with declines in black market premia.

JEL classification: F15, F36

Key words: financial integration, factor-market integration, trade productivities, black market exchange rates

The authors thank the Associazione Guido Carli and Fondazione Cesifin Alberto Predieri for supporting the Fifth Colloquium at which this paper was presented and at which they received many helpful comments. They also thank participants at the INFINITI conference at Trinity College in Dublin, Ireland, for helpful comments, the Federal Reserve Bank of Atlanta for research support, and Linda Mundy for editorial assistance. Baier appreciates financial support from the National Science Foundation for related research. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Scott L. Baier, Clemson University, 222 Sirrine Hall, Clemson, SC 29634-1309, 864-656-4534,, or Gerald P. Dwyer Jr., Vice President, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309, 404-498-7095, 404-498-8810 (fax),

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.