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

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 way only 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

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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: