CAPITAL-MARKET INTEGRATION

Liberalization in the EC in 1992 should produce perfect capital market integration. To show the short- and long-run effects of perfectly integrated capital markets, we develop a tractable growth model where investment flows to earn the highest rate of return. The economy first goes through potential, and then actual, integration, before and after rates of return are equalized. We show relative changes of capital intensities, outputs per capita, rates of return and the real exchange rate during both stages of integration. © 1990.