Introduction

One of the features of most currency unions is that they contain an integrated national capital market, which can be used by private individuals to borrow and lend capital across regions within the union. In addition to allowing capital to be transferred across regions, the existence of an integrated capital market also allows individuals to insure themselves against region-specific risk by holding a diverse portfolio of assets. The extent to which individuals actually use capital markets in these ways is the focus of this chapter.

Regional data for the United States of America are used to estimate the importance of these two factors. The United States is an obvious candidate for such an investigation, since it is a large, well-integrated currency area with freely functioning capital markets. Examining behavior within the United States sheds light on the importance of private capital markets in economic adjustment within market economies in general. It also gives pointers as to the probable impact of more open international capital markets on behavior across countries, particularly in Europe where the progress toward Economic and Monetary Union (EMU) is rapidly creating an integrated capital market.

We begin by examining regional data from the United States on product and income for evidence of intertemporal trade among the regions of the United States. The regional data are collected on a basis similar to that under which components of the national data on gross national product (GNP) and gross domestic product (GDP) are calculated, so that these data allow rough calculations of the magnitude of inter-regional net factor payments.