Interest Rate Convergence Research Articles

The Integration of Regional and Interregional Capital Markets: Evidence from the Pacific Coast, 1883–1913

The literature on national capital market integration in nineteenth-century America has overlooked the role of markets at a regional level. Such markets were important in reducing the possible burden of isolation by efficiently recycling local savings, and in promoting eventual integration into a national financial market. This article presents evidence that a commercial market centered on San Francisco extended into the Pacific Coast states and formed the basis for a regional financial market. The degree of market integration is measured through tests of interest rate covariability and convergence.

LESSONS FROM THE SOUTHERN CONE POLICY REFORMS

This article assesses the design of stabilization and liberalization programs in the Abstract Southern Cone countries of Argentina, Chile, and Uruguay. With the exception of Chile, the reforms were not as widespread as some believed. Little trade liberalization took place in Argentina and Uruguay, although some of the antiexport bias was reduced by eliminating taxes on traditional exports. In all three countries, labor markets remained fairly highly regulated, though it was easier to dismiss labor. In general, liberalization was gradual: even Chile's trade liberalization spanned five years. The article also shows that the collapse of the three economies in the early 1980s cannot be ascribed mainly to terms of trade and interest rate shocks. The main causes of failure were poorly designed programs and poor implementation. These errors included restrictive wage legislation (Chile) or political instability combined with a preoccupation with keeping unemployment as low as possible (Argentina). Monetary policy to deal with growing fiscal deficits was inconsistent with the accompanying exchange rate policy (Argentina throughout its reform period and Uruguay toward the end of its reforms). Financial deregulation was not matched by appropriate supervision of the financial institutions. The article suggests several policy lessons for countries attempting to resume growth and restore external balance through a combination of liberalization and stabilization policies. First, it finds evidence that reductions in distortions produced efficiency gains in Chile and Uruguay even though Uruguay's reforms were short-lived. Second, the article shows that policy inconsistencies undermined the credibility of the later stages of reform in all three countries, eventually producing a crisis. Third, it presents data that call into question the use of exchange rate-based stabilization, because of the slow convergence of domestic prices and interest rates to international levels, which in turn can produce unsustainably large capital movements. Fourth, the article stresses the need for caution in financial deregulation.