Working Paper: CEPR ID: DP1633
Authors: Maurice Obstfeld; Alan M. Taylor
Abstract: This paper surveys the evolution of international capital mobility since the late-nineteenth century. It begins with an overview of empirical evidence on the fall and rise of integration in the global capital market. A discussion of institutional developments focuses on the use of capital controls and the pursuit of domestic macroeconomic policy objectives in the context of changing monetary regimes. A fundamental macroeconomic policy trilemma has forced policy-makers to trade off conflicting goals. The natural implication of the trilemma is that capital mobility has prevailed and expanded under circumstances of widespread political support either for an exchange rate subordinated monetary policy regime (e.g. the gold standard), or for a monetary regime geared mainly towards domestic objectives at the expense of exchange rate stability (e.g. the recent float). Through its effect on popular attitudes towards both the gold standard and the legitimate scope for government macroeconomic intervention, the Great Depression emerges as the key turning point in the recent history of international capital markets.
Keywords: capital controls; capital mobility; great depression; inconsistent trinity
JEL Codes: E52; F33; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gold standard (E42) | Economic turmoil during the Great Depression (N14) |
| Capital controls (F38) | Contraction in international capital mobility (F32) |
| Government macroeconomic policies (E60) | Exchange rate stability (F31) |
| Economic policies during Great Depression (E65) | Contraction in international capital mobility (F32) |
| Liberalization of capital movements (F32) | Response to failures of the interwar period (P11) |