On the Global Financial Market Integration ‘Swoosh’ and the Trilemma

41 Pages Posted: 24 Jan 2017 Last revised: 12 May 2019

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Arnaud Mehl

European Central Bank (ECB)

Date Written: November 1, 2017


We propose a simple measure of de facto financial market integration based on a factor model of monthly equity returns, which can be computed back to the first era of financial globalization for 17 countries. Global financial market integration follows a “swoosh” shape – i.e. high pre-1913, still higher post-1990, low in the interwar period – rather than the other shapes hypothesized in earlier literature. We find no evidence of financial globalization reversing since the Great Recession as claimed in other recent studies. De jure capital account openness and global growth uncertainty are the two main determinants of long-run global financial market integration. We use our measure to revisit the debate on the trilemma between financial openness, the exchange rate regime, and monetary policy autonomy, and on whether the trilemma has recently morphed into a dilemma due to global financial cycles. We find evidence consistent with the trilemma and inconsistent with the dilemma hypothesis, both throughout history and for the recent decades; non-US central banks still exert more control over domestic interest rates when exchange rates are flexible in economies open to global finance.

Keywords: Financial Globalization and Deglobalization, Market Integration, Factor Model, U-Shape vs. J-Shape Hypotheses, Monetary Policy Trilemma, Dilemma Hypothesis

JEL Classification: F3, E52, N2

Suggested Citation

Bekaert, Geert and Mehl, Arnaud, On the Global Financial Market Integration ‘Swoosh’ and the Trilemma (November 1, 2017). Columbia Business School Research Paper No. 17-17, Available at SSRN: https://ssrn.com/abstract=2904272 or http://dx.doi.org/10.2139/ssrn.2904272

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Arnaud Mehl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

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