Comment on “International Financial Integration”

Lane and Milesi-Ferretti gather data on assets and liabilities of 18 OECD countries. The data are classified by type of asset–debt instruments and equity instruments (either portfolio or foreign direct investment). To some extent the data allow them to classify changes in asset and liability positions that occur because of capital flows versus changes in valuation. With this data, Lane and Milesi-Ferretti undertake two types of empirical examinations. First, they look at the correlation of international asset positions with various “explanatory variables,” such as the degree of financial restrictions, the depth of the financial market, the openness to international trade, etc. Then they examine returns on the various classes of assets (debt, portfolio equity, and FDI), in an attempt to measure from the returns the degree of diversification that is being offered by international investments. My comments come in two categories: brief comments about the data and comments about how to interpret the findings. The latter set of comments is broken into two parts, the first relating to the regressions describing asset and liability positions and the second relating to the empirical work on rates of return.