This paper is one of four in this Working Paper Series, focusing on financial liberalisation, along with those of Kupiec, Miller and Weller, and Driscoll. It examines the extent to which international financial markets have become more integrated over the past decade. The finding that financial markets are almost fully integrated, in contrast to goods markets which are not, has important implications for real interest rate differentials, real exchange rate behaviour and external adjustment. In particular, the reduced importance of external imbalance and the increased role of real interest rates in real exchange rate determination can be associated with more prolonged misalignments ...