Working Paper: CEPR ID: DP5398
Authors: Marc Flandreau
Abstract: This paper discusses the existence of 'home' biases in the 19th century global capital market, whereby colonies appear to have received a 'disproportionate' amount of capital from their metropolis. Starting from a discussion of the Bulow Rogoff (1989) problem, we argue that imperial links provided a natural institutional framework to make pre-commitment credible by ensuring an adequate degree of willingness to pay. This was not because imperial rule provided coercion or punishment, but rather because it supplied a legal framework that effectively suppressed the « sovereign » nature of colonial debts. We conclude that the greater facility with which capital migrated in the 19th century has much to do with the fact that colonies were more akin to the 'regions' of modern countries
Keywords: colonies; home bias; Lucas paradox; willingness to pay
JEL Codes: F31; N32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| imperial links (F54) | credibility of precommitment to debt repayment (G51) |
| credibility of precommitment to debt repayment (G51) | flow of capital from metropolises to colonies (F54) |
| imperial governance (F54) | capital migration patterns (F20) |
| legal frameworks during colonial rule (N40) | sovereign nature of colonial debts (H63) |
| political geography of the time (R12) | integration of capital markets (F30) |
| legal frameworks during colonial rule (N40) | moral hazard (G52) |
| political biases in lending (G21) | capital allocation (G31) |