Convertibility, Currency Controls and the Cost of Capital in Western Europe, 1950-1999
UPF Department of Economics Working Paper No. 551
37 Pages Posted: 29 May 2001
Date Written: May 30, 2001
For most of the postwar period, Europe's capital markets remained largely closed to international capital flows. This paper explores the costs of this policy. Using the familiar event-study methodology, we examine the extent to which restrictions of current and capital account convertibility affected stock returns. We find that the delayed introduction of full currency convertibility increased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapse of the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mounting evidence suggesting that capital account liberalization facilitates growth.
Keywords: Cost of capital, liberalization, current account, Capital account, convertibility
JEL Classification: G15, G18, F21, F36, N24, N74
Suggested Citation: Suggested Citation