Any new available information is accurately processed and impounded in asset prices, leading to more accurate pricing of assets and risks. And the permanent quest for arbitrage opportunities has fostered crossmarket and cross-border strategies also leading to more consistent pricing. Allocative efficiency, that is the market’s ability to allocate resources in a way that maximises the welfare attained through their use, has also improved: for a given investor, there is a wider and more diversified range of investment opportunities than ever before. Operational efficiency has so far gained from globalisation, since the cost of financial operations has quickly fallen, due to productivity gains in the financial sector stemming from the scale and scope of economies and the intense competition between markets and intermediaries. Nevertheless, this overall trend towards efficiency occasionally bumps into puzzles that are not readily explained by economic theory. For instance, the longstanding question as to why capital does not flow, in net terms, from rich to poor countries has not yet been clarified since it was first addressed by Robert Lucas. It has recently been supplemented by the so-called “allocation puzzle”, highlighting the fact that capital seems to flow toward economies with relatively low investment rates. Convincing explanations for these puzzles certainly require taking into account market imperfections (such as credit constraints), differences in financial infrastructures as well as growth externalities (such as human capital). Another salient feature of financial globalisation is the rapid maturing of emerging economies and markets.

Some analysts have suggested that, because of capital market integration, real interest rates will equalize around the world, thus reducing the ability of national Central Banks to control inflation. However, this need not be the case. Indeed, the classic Mundell-Fleming analysis concludes that monetary policy should be more effective, rather than less, in the case of international capital mobility, although it can operate through different channels of transmission including the exchange rate. Furthermore, in many emerging countries, strong capital inflows confront monetary policy with a dilemma between pursuing internal and external objectives, in a context of rising inflationary pressures. Taming capital inflows would call for a relaxation of monetary policy, at the risk however of compromising on the domestic objective of maintaining low inflation. Sterilisation cannot always be relied upon to resolve this dilemma as it is likely to be ineffective in the long term and fuel other imbalances such as excessive accumulation of foreign exchange reserves. A second question is the potential for global contagion. As a direct consequence of cross-border financial integration, local price or liquidity shocks are more likely to spread around the globe. Large-scale liquidity creation resulting from monetary (or exchange rate) policy in one country may fuel asset price bubbles elsewhere. One current example might be seen in carry trades, which have become a major driver of a number of currencies, including the yen. Therefore, distant events can have sharp impacts, even on local institutions or investors. New contagion channels have emerged.