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Capital Controls and Recovery from the Financial Crisis of the 1930s

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  • Mitchener, Kris James

    (University of Warwick)

  • Wandschneider, Kirsten

    (Occidental College)

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    Abstract

    We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-indifferences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series regressions further demonstrate that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy. Even so, capital controls remained in place as instruments for manipulating trade flows and for preserving foreign exchange for the repayment of external debt.

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    Bibliographic Info

    Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 132.

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    Date of creation: 2013
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    Handle: RePEc:cge:warwcg:132

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    Web page: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/
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    Keywords: capital controls; financial crises; Great Depression; interwar gold standard;

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    1. Robert B. Barsky & J. Bradford De Long, . "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," J. Bradford De Long's Working Papers _121, University of California at Berkeley, Economics Department.
    2. Barro, Robert J, 1979. "Money and the Price Level under the Gold Standard," Economic Journal, Royal Economic Society, vol. 89(353), pages 13-33, March.
    3. Marc Flandreau & Kim Oosterlinck, 2011. "Was the Emergence of the International Gold Standard Expected?Melodramatic Evidence from Indian Government Securities," Working Papers CEB 11-001, ULB -- Universite Libre de Bruxelles.
    4. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
    5. Bordo, Michael D. & Rockoff, Hugh, 1996. "The Gold Standard as a “Good Housekeeping Seal of Approval”," The Journal of Economic History, Cambridge University Press, vol. 56(02), pages 389-428, June.
    6. Shiller, Robert J & Siegel, Jeremy J, 1977. "The Gibson Paradox and Historical Movements in Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 891-907, October.
    7. Tullio, Guiseppe & Wolters, Jürgen, 2004. "Monetary policy in Austria-Hungary, 1876 - 1913: An econometric analysis of the determinants of the Central Bank's discount rate and the liquidity ratio," Discussion Papers 2004/24, Free University Berlin, School of Business & Economics.
    8. Flandreau, Marc & Galimard, Christophe & Jobst, Clemens & Nogués Marco, Maria Del Pilar, 2006. "The Bell Jar: Commercial Interest Rates between Two Revolutions, 1688-1789," CEPR Discussion Papers 5940, C.E.P.R. Discussion Papers.
    9. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867-1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2.
    10. Harley, C. Knick, 1977. "The interest rate and prices in Britain, 1873-1913: A study of the Gibson Paradox," Explorations in Economic History, Elsevier, vol. 14(1), pages 69-89, January.
    11. Perez, Stephen J & Siegler, Mark V, 2003. " Inflationary Expectations and the Fisher Effect prior to World War I," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 947-65, December.
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