It is generally considered all too obvious that the world's financial markets have become continuously, dramatically and unprecedentedly open in the years since the end of World War II. And often in the same breath, the equally obvious explanation is provided that these facts are the consequences of advances in computers and high-speed communications.
In this essay I demonstrate that financial markets have certainly tended toward greater openness since the end of World War II; but, they have reached a degree of integration that is neither dramatic nor unprecedented in the larger historical context of several centuries.2. Moreover, as is strongly suggested by the latter observation, today's openness is not in any important way a consequence of today's information technology.
Here, as in other chapters of this volume, financial openness is of interest because of its consequences for the autonomy of national economic policy. How shall we define financial openness? If our concern is constraints on policy freedom, then our measure of openness might be the dependence of a nation's interest rates, stock market prices, or exchange rate on events in the rest of the world. If a nation's interest rates converge toward or move in common with world interest rates, that nation may have lost control of its interest rates and/or money supply to the world. Of course it may also have lost control of its interest rates with the world to some common cause.
Since it is especially in the nature of financial asset prices to adjust swiftly to important developments, it is particularly appropriate to examine their prices rather than the flow of funds across national boundaries "into" or "out of assets. The necessary price adjustments in interdependent financial markets will in theory and sometimes do in practice take place without any transactions occurring. That is financial asset prices can change to incorporate new information before any new transactions take place, or can eliminate the profit of arbitrage before any arbitrageurs have traded.
Exactly what behavior of financial asset prices shall we look for to confirm the existence of relatively open or closed financial markets? The question is not trivial because geographically separate markets can be integrated in two theoretically distinct but empirically overlapping senses. If news of hostilities between two countries caused bond prices to fall in all the world's major markets, we could conclude that these markets were part of a single efficient system for disseminating and responding to the information concerning a new war and its presumed impact upon aggregate demand. Similarly, if we could show that changes in the expected depreciation of sterling against the dollar in three months' time are directly matched by changes in the difference between interest rates on three-month UK and US treasury bills, this again would demonstrate the efficiency of the transatlantic markets for treasury bills and foreign exchange.
