CONSUMPTION, INCOME, AND INTERNATIONAL CAPITAL-MARKET INTEGRATION

This paper uses consumption patterns across countries to measure capit al market integration. It argues that earlier empirical tests of this type were potentially misspecified and proposes a more robust specific ation. The results indicate that Japan was the only industrialized cou ntry for which national consumption was fully integrated with the rest of the world over the period 1973-92. The main source of failure is e xcess sensitivity of consumption to home income. Particularly within t he European Community, however, there is also evidence that real inter est rates are nor equalized.