Obstfeld and taylor (2002). globalization and capital markets.

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Obstfeld and Taylor (2002). Globalization and capital markets. Overview of international capital markets: 1. purpose, history and hypothesis 2. empirical evidences on variation in globalization 3. interpretation Benefits and costs of financial globalization (compare trade in goods) Benefit: efficient distribution of resources i.e. savings for investments Costs: 1. possibility of financial crisis:Asia 1997-98, Russia 1998. Turkey 2000-01, Argentina 2001 -02 etc. 2. taxation 4. No international lender of last resort, no international FSA -except IMF’ 5. Financial globalization has implication for national economic policies Variation in the degree of financial globalization over time: 1. Four periods.1870-WWI, WWWI- WWWII, 1945-1971/73, 19732. Why this variations: a. technology – one wayonly b. economic policies (exchange rates, restrictions on capital movements) ad 2 b : Organising principle for discussion is the impossible triangle/ the trilemma (and why has the combination changed over time): • Free movements of capital • Fixed exchange rates • Independent monetary policy financial markets and exchange rate system is interrelated


Some financial history: (Renaissance:developments of banks (Venice, Amsterdam, Antwerp, London The industrial revolution in 18th century: London Interwar period 1914-39: decline of London, increasing importance of New York) According to the international exchange rate system: - before 1870’s different national basis for domestic money supply: silver, gold or silver/gold. More interrelated national systems than an international system -1870’s – 1914. The gold standard with fixed exchange rates, no formal international agreement, sometimes suspension but stability due to return to former parity/price of gold, no restrictions on capital or gold movements, external orientation of monetary policy, economic stability and growth with high degree of globalization of financial markets - Interwar period. Three different systems. First:War disruptions to different degrees, internal orientation of economic policies (employment) points to flexible exchange rates. Second: return to gold exchange standard in the mid 1920’s. hoping to get stability, but … Third: depression in the 1930’s leads to restrictions on trade and capital. - Bretton Woods period 1945/59- 1971/73. Reconstruction and economic growth. IMF. Fixed, but in principleadjustable exchange rates and possibility of restrictions on capital movements. Break down of Bretton Woods in 1971/73 due to 1. capital movements and 2. disagreement on price developments (US/Germany) 3. disagreement on US as the financial center (US/France) - Variable exchange rates between the main currencies since 1973 with some regional cooperation on fixed exchange rates (i.e. EMS, EMU)Capital restrictions gradually abolished, which leads to increasing globalization of financial markets.


Why this U-shaped development of financial globalization ? - Not technical changes as only improvements - Political explanations using the impossible triangle: 1. free capital mobility 2. a fixed exchange rate 3.independent monetary policy - but (1,2) , (2,3) and (1,3) are possible. How toexplain the choice and accordingly the globalization under the gold standard and after 1973? Possibilities: a. technological development and increased competition b. competition between countries for political or economic dominance c. domestic political reasons d. ideology or better economic theory/understanding The central question is about the importance of b. dominance and c. domestic reasons– they one not necessarily exclude the other. (Another issue is intermediate forms of exchange rate regimes: Free float, crawling peg, target zone, managed float/ fixed, but adjustable exchange rate, currency union (with common currency), dollarization – but here only broad explanation between fixed versus flexible exchange rate) Suggestions for explanantions (to be discussed further after...