Patterns of financial change in the OECD area

This paper measures the nature and determinants of financial change by studying interest rate differentials among OECD countries. First, a simple model illuminates the various determinants of international capital mobility. The framework is used to deduce the characteristics of three fundamentally different but analytically connected patterns of financial change: financial integration, asset substitution and monetary integration. Next, the empirical analysis aims at quantifying these patterns for two regions: the FizWorld and the FlexWorld, which differ as to their exchange rate commitment. The results are discussed against the background of some dominant institutional changes in the countries concerned. The policy implications are presented in a monetary policy conflict triangle.