The Consequences of Bretton Woods Impediments to International Capital Mobility and the Value of Geopolitical Stability
33 Pages Posted: 2 Nov 2020
Date Written: October, 2020
This paper quantifies the positive and normative effects of capital controls on international economic activity under The Bretton Woods international financial system. We develop a three-region world economic model consisting of the U.S., Western Europe, and the Rest of the World. The model allows us to quantify the impact of these controls through an open economy general equilibrium capital flows accounting framework. We find these controls had large effects. Counterfactuals show that world output would have been 6% larger had the controls not been implemented. We show that the controls led to much higher welfare for the rest of the world, moderately higher welfare for Europe, but much lower welfare for the U.S. We interpret the large U.S. welfare loss as an estimate of the implicit value to the U.S. of preventing capital flight from other countries and thus promoting economic and political stability in ally and developing countries.
Keywords: Bretton Woods, International Payments, Capital Flows
JEL Classification: E21, F21, F41, J20
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