In theory and practice, the extent of international capital mobility can have profound implications for the operation of individual economies and and the global economy. With respect to theory, the applicability of various classes of macroeconomic models rests on many assumptions, and not the least important of these are axioms linked to the closure of the model in the capital market. The predictions of a theory and its usefulness for policy debates can revolve critically on this part of the structure.

The importance of these issues for policy is equally clear. Capital mobility can drastically alter the efficacy of a range of policy interventions, from capital taxation to domestic monetary management. Thus, the feasibility and relevance of key policy actions cannot be judged absent some informed position on the extent to which local economic conditions are in any way separable from global ones. This implies that an empirical measure of market integration is implicitly, though rarely explicitly, a necessary adjunct to any policy discussion. Although recent globalization trends have brought this issue to the fore, this book illustrates how the experience of longer run macroeconomic history can clarify and inform these debates.

In attacking the problem of measuring market integration, economists have no universally recognized criterion to turn to. For example, imagine the simple expedient of examining price differentials. Prices could be identical in two identical neighboring economies, being determined in each by the identical structures of tastes, technologies, and endowments. But if the two markets were physically separated by a prohibitively high transaction-cost barrier, one would hardly describe them as being integrated into a single market. Rather, the equality of prices would be a mere chance event.