The Consequences of Bretton Woods Impediments to International Capital Mobility and the Value of Geopolitical Stability

33 Pages Posted: 2 Nov 2020

See all articles by Lee E. Ohanian

Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Paulina Restrepo-Echavarria

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Diana Van Patten

Princeton University

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: October, 2020

Abstract

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

Suggested Citation

Ohanian, Lee E. and Restrepo-Echavarria, Paulina and Van Patten, Diana and Wright, Mark L.J., The Consequences of Bretton Woods Impediments to International Capital Mobility and the Value of Geopolitical Stability (October, 2020). FRB St. Louis Working Paper No. 2020-42, Available at SSRN: https://ssrn.com/abstract=3722352 or http://dx.doi.org/10.20955/wp.2020.042

Lee E. Ohanian (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Paulina Restrepo-Echavarria

Federal Reserve Banks - Federal Reserve Bank of St. Louis

P.O. Box 442
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Diana Van Patten

Princeton University ( email )

United States

Mark L.J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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