export proceeds surrender requirements, the presence of multiple exchange rates, and the five-year rolling average of the IMF binary capital account restrictions. When each indicator is crudely measured (as is the case with the binary indicators of the AREAER), the first principal component provides an intuitively appealing composite measure (Quinn, Schindler and Toyoda, 2011). This measure is available for 182 countries for the period 1970-2011.

Our second de jure measure, initially put together by Quinn (1997), relies on indicators of capital account regulations based on a coding of the AREAER texts. This is also a composite index assigning equal weights to six categories: payments for imports; receipts from exports; payments for invisibles; receipts from invisibles; capital flows by residents; and capital flows by nonresidents. The Quinn index covers 90 countries over the period 1960-2011. We use these two measures in our regressions since they offer higher degrees of intensity and finer gradation for a large number of countries over an extended time period. We normalize the measures so each ranges between zero and one, where zero suggests restrictions on the capital account and 1 indicates that the capital account is fully liberalized.

We present the temporal evolutions of these measures of financial integration in Figure 1. Irrespective of the measure, the degree of financial integration has been increasing over time for the full sample. The increase has been fueled by a series of trade and financial liberalization initiatives around the world since the mid-1980s. Only about 15 percent of the countries in our sample had fully open capital accounts in 1984 compared to more than 50 percent in late 2000s.

This trend is largely driven by the group of developing economies as they have increasingly become more integrated to the global economy during the last two decades. Almost all of the advanced countries now have open capital accounts as implied by the de jure measures whereas a number of developing countries still maintain relatively closed capital accounts. In the case of the Chinn-Ito indicators, the average degree of financial integration for developing countries peaked at 0.5 in 2008, compared to 0.96 for advanced economies. For example, the Chinn-Ito indicator suggests that for Denmark, France and Norway, the degree of financial integration increased from 0.4 in the early 1970s to 1 (fully open) starting in the early 1990s. The same indicator suggests that, for Colombia, the degree of financial integration increased from 0 (completely closed) in the late 1980s to 0.4 starting in 2004. For Brazil, the Chinn-Ito indicator suggests that the degree of financial integration was 0 (completely closed) until 1997 but reached 0.53 in 2006.

Our database also includes world and country-specific interest rates. For the world interest rate, we use the dollar London Interbank Offer Rate (LIBOR) rate. The real rate is adjusted for US inflation using the consumption price index from the Penn World Tables (PWT 8.1). For the country-specific real interest rates, we use the LIBOR rate adjusted by the country-specific consumption price indices in PWT 8.1.

# 2.2 Basic Econometric Framework

We follow the large literature that has tested various implications of the consumption Euler equation. We start with the basic consumption-saving decision of a representative agent whether to consume today or invest in a risk-free asset. The representative agent maximizes utility function u(Ct<sup>j), where jindexes the countries, j= 1, . . . , Jand C</sup> t<sup>jdenotes aggregate consumption at time t.</sup> As usual, we also assume that countries have access to risk-free international bond markets, where 5