Working Paper: CEPR ID: DP451
Authors: Barry Eichengreen
Abstract: Over the past century, the world economy has passed through a succession of phases characterized by very different levels of international capital flows. This paper asks what accounts for these dramatic shifts in the extent of capital movements across national borders. Three categories of explanation are considered. The first emphasizes the policy regime, attributing the unusual extent of capital flows prior to 1914 to the operation of the international gold standard. The second focuses on the stages-of-indebtedness sometimes thought to characterize the process of economic development. The third ascribes changes in the extent of capital flows to the boom-and-bust cycles through which international capital markets are thought to pass. Though each approach contributes something to our understanding of the phenomenon, none is totally satisfactory. I therefore suggest an alternative explanation, which lays stress on the increase in the magnitude of real interest rate and real exchange variability that has occurred over the last 100 years.
Keywords: capital flows; debt; gold standard
JEL Codes: 040; 400
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| operation of the international gold standard (F33) | capital flows (F32) |
| lack of regulation on foreign lending prior to 1913 (F65) | capital flows (F32) |
| post-1913 interventions by governments (N42) | capital flows (F32) |
| stages of indebtedness (F34) | foreign lending volumes (F34) |
| financial innovations (O16) | lending surges (G21) |
| market disturbances (D53) | crises (H12) |
| external shocks (commodity price fluctuations and interest rate volatility) (F31) | defaults (Y60) |
| defaults (Y60) | reduction in lending activity (G21) |
| increased volatility in real interest rates and exchange rates (F31) | decline in international lending (F34) |