Once again, this is a familiar and intuitively plausible proposition that would seem
to be borne out by a series of high-profile speculative flurries against ‘‘rogue’’
governments in recent decades. It is, however, an empirical claim and one that a
growing body of scholarship reveals to be considerably at odds with the empirical
evidence. For capital markets do not seem to be as perfectly integrated as the
globalization literature invariably assumes. In particular, the anticipated convergence
in interest rates which one would expect from a fully integrated global capital market
is simply not exhibited (Hirst and Thompson 1999; Zevin 1992). Moreover, financial
integration has also failed to produce the anticipated divergence between rates of
domestic savings and rates of domestic investment which one would expect in a fully
integrated global capital market—the so-called ‘‘Feldstein–Horioka puzzle’’ (Feldstein
and Horioka 1980; see also Epstein 1996, 212–15; Watson 2001a). Finally, though
the liberalization of financial markets has certainly increased the speed, severity, and
significance of investors’ reactions to government policy, capital market participants
appear far less discriminating or well informed in their political risk assessment than
is conventionally assumed (Mosley 2003; Swank 2002). Consequently, policy makers
may retain rather more autonomy than is widely accepted. Speculative dynamics, it
seems, are in fact relatively rarely unleashed against currencies and, at least as far as
the advanced liberal democracies are concerned, the range of government policies