IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/10019.html
   My bibliography  Save this paper

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

Author

Listed:
  • Mitchener, Kris
  • Wandschneider, Kirsten

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-in-differences (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 analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.

Suggested Citation

  • Mitchener, Kris & Wandschneider, Kirsten, 2014. "Capital Controls and Recovery from the Financial Crisis of the 1930s," CEPR Discussion Papers 10019, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10019
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP10019
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Eichengreen, Barry & Irwin, Douglas A., 2010. "The Slide to Protectionism in the Great Depression: Who Succumbed and Why?," The Journal of Economic History, Cambridge University Press, vol. 70(4), pages 871-897, December.
    2. Ethan Kaplan & Dani Rodrik, 2002. "Did the Malaysian Capital Controls Work?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 393-440, National Bureau of Economic Research, Inc.
    3. Eichengreen, Barry & Irwin, Douglas A., 1995. "Trade blocs, currency blocs and the reorientation of world trade in the 1930s," Journal of International Economics, Elsevier, vol. 38(1-2), pages 1-24, February.
    4. Markus Lampe & Paul Sharp, 2013. "Tariffs and income: a time series analysis for 24 countries," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 7(3), pages 207-235, September.
    5. Price Fishback, 2010. "US monetary and fiscal policy in the 1930s," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 385-413, Autumn.
    6. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    7. Wei, Shang-Jin & Zhang, Zhiwei, 2007. "Collateral damage: Exchange controls and international trade," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 841-863, September.
    8. Michael W. Klein & Jay C. Shambaugh, 2015. "Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 33-66, October.
    9. Stephanie Schmitt-Grohe & Martin Uribe, 2012. "Prudential Policy for Peggers," NBER Working Papers 18031, National Bureau of Economic Research, Inc.
    10. Nikolay Nenovsky & Giovanni Pavanelli & Kalina Dimitrova, 2007. "Exchange Control in Italy and Bulgaria in the Interwar Period: History and Perspectives," ICER Working Papers 40-2007, ICER - International Centre for Economic Research.
    11. Edwards, Sebastian & Rigobon, Roberto, 2009. "Capital controls on inflows, exchange rate volatility and external vulnerability," Journal of International Economics, Elsevier, vol. 78(2), pages 256-267, July.
    12. Wolf, Nikolaus & Ritschl, Albrecht, 2003. "Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-War Period," Papers 2004,10, Humboldt University of Berlin, Center for Applied Statistics and Economics (CASE).
    13. Ritschl, Albrecht, 2002. "Deficit Spending in the Nazi Recovery, 1933-1938: A Critical Reassessment," Journal of the Japanese and International Economies, Elsevier, vol. 16(4), pages 559-582, December.
    14. Wolf, Nikolaus, 2008. "Scylla and Charybdis. Explaining Europe's exit from gold, January 1928-December 1936," Explorations in Economic History, Elsevier, vol. 45(4), pages 383-401, September.
    15. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos d Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
    16. Grossman, Richard S., 1994. "The Shoe That Didn't Drop: Explaining Banking Stability During the Great Depression," The Journal of Economic History, Cambridge University Press, vol. 54(3), pages 654-682, September.
    17. Eichengreen, Barry & Sachs, Jeffrey, 1985. "Exchange Rates and Economic Recovery in the 1930s," The Journal of Economic History, Cambridge University Press, vol. 45(4), pages 925-946, December.
    18. K. Dimitrova & Nikolay Nenovsky & G. Pavanelli, 2007. "Exchange rate control in Italy and Bulgaria in the interwar period. History and Perspectives," Post-Print halshs-00259693, HAL.
    19. Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 317-367.
    20. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402, National Bureau of Economic Research, Inc.
    21. Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(2 (Fall)), pages 317-367.
    22. Wandschneider, Kirsten, 2008. "The Stability of the Interwar Gold Exchange Standard: Did Politics Matter?," The Journal of Economic History, Cambridge University Press, vol. 68(1), pages 151-181, March.
    23. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "Monetary Sovereignty, Exchange Rates, and Capital Controls: The Trilemma in the Interwar Period," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 75-108, June.
    24. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
    25. Larry Neal, 1979. "The Economics and Finance of Bilateral Clearing Agreements: Germany, 1934-8," Economic History Review, Economic History Society, vol. 32(3), pages 391-404, August.
    26. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, August.
    27. Ms. Natalia T. Tamirisa & Mr. R. B. Johnston, 1998. "Why Do Countries Use Capital Controls?," IMF Working Papers 1998/181, International Monetary Fund.
    28. Emmanuel Farhi & Ivan Werning, 2012. "Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates," NBER Working Papers 18199, National Bureau of Economic Research, Inc.
    29. Blouin, Arthur & Ghosal, Sayantan & Mukand, Sharun, 2011. "Globalization and the (Mis)Governance of Nations," CAGE Online Working Paper Series 69, Competitive Advantage in the Global Economy (CAGE).
    30. Barry Eichengreen, 1992. "The origins and nature of the Great Slump revisited," Economic History Review, Economic History Society, vol. 45(2), pages 213-239, May.
    31. Eichengreen, Barry & Portes, Richard, 1986. "Debt and default in the 1930s : Causes and consequences," European Economic Review, Elsevier, vol. 30(3), pages 599-640, June.
    32. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferretti, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
    33. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(4), pages 757-784, December.
    34. Richard S. Grossman & Christopher M. Meissner, 2010. "International aspects of the Great Depression and the crisis of 2007: similarities, differences, and lessons," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 318-338, Autumn.
    35. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 65-84, Fall.
    36. repec:zbw:bofrdp:1992_003 is not listed on IDEAS
    37. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
    38. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 1-28, February.
    39. Campa, José Manuel, 1990. "Exchange Rates and Economic Recovery in the 1930s: An Extension to Lation America," The Journal of Economic History, Cambridge University Press, vol. 50(03), pages 677-682, September.
    40. Choudhri, Ehsan U & Kochin, Levis A, 1980. "The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 565-574, November.
    41. Mr. Marcos d Chamon & Miss Mahvash S Qureshi & Dennis B. S. Reinhardt & Mr. Atish R. Ghosh & Mr. Karl F Habermeier & Mr. Jonathan David Ostry, 2010. "Capital Inflows: The Role of Controls," IMF Staff Position Notes 2010/004, International Monetary Fund.
    42. Eichengreen, Barry & Portes, Richard, 1990. "The Interwar Debt Crisis and Its Aftermath," The World Bank Research Observer, World Bank Group, vol. 5(1), pages 69-94, January.
    43. Derek H. Aldcroft & Michael J. Oliver, 1998. "Exchange Rate Regimes in the Twentieth Century," Books, Edward Elgar Publishing, number 865.
    44. Christopher J. Neely, 1999. "An introduction to capital controls," Review, Federal Reserve Bank of St. Louis, vol. 81(Nov), pages 13-30.
    45. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martin Ellison & Sang Seok Lee & Kevin Hjortshøj O'Rourke, 2024. "The Ends of 27 Big Depressions," American Economic Review, American Economic Association, vol. 114(1), pages 134-168, January.
    2. Jalil, Andrew J. & Rua, Gisela, 2016. "Inflation expectations and recovery in spring 1933," Explorations in Economic History, Elsevier, vol. 62(C), pages 26-50.
    3. Raphaël Hekimian & David Le Bris, 2016. "US Crashes of 2008 and 1929 How did the French market react? An empirical study," Working Papers hal-04141589, HAL.
    4. Bechlioulis, Alexandros & Economidou, Claire & Karamanis, Dimitrios & Konstantios, Dimitrios, 2023. "How important are capital controls in shaping innovation activity?," Journal of International Money and Finance, Elsevier, vol. 131(C).
    5. Berbenni, Enrico, 2021. "External devaluation and trade balance in 1930s Italy," Structural Change and Economic Dynamics, Elsevier, vol. 57(C), pages 93-107.
    6. Albers, Thilo Nils Hendrik, 2018. "The prelude and global impact of the Great Depression: Evidence from a new macroeconomic dataset," Explorations in Economic History, Elsevier, vol. 70(C), pages 150-163.
    7. Mingjin Luo & Shenqguan Wang, 2023. "Financialization and sluggish recovery of firms' investment: Global evidence from the 2007–2008 financial crisis," International Finance, Wiley Blackwell, vol. 26(3), pages 344-363, December.
    8. Gkillas (Gillas), Konstantinos & Tsagkanos, Athanasios & Siriopoulos, Costas, 2016. "The risk in capital controls," Finance Research Letters, Elsevier, vol. 19(C), pages 261-266.
    9. Raphael Hekimian & David Le Bris, 2016. "US Crashes of 2008 and 1929 How did the French market react? An empirical study," EconomiX Working Papers 2016-21, University of Paris Nanterre, EconomiX.
    10. Jin, Yuying & Luo, Mingjin & Wan, Chao, 2018. "Financial constraints, macro-financing environment and post-crisis recovery of firms," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 54-67.
    11. Athanasios Tsagkanos & Konstantinos Gkillas & Christoforos Konstantatos & Christos Floros, 2021. "Does Trading Volume Drive Systemic Banks’ Stock Return Volatility? Lessons from the Greek Banking System," IJFS, MDPI, vol. 9(2), pages 1-13, April.
    12. Sabaté, Marcela & Fillat, Carmen & Escario, Regina, 2019. "Budget deficits and money creation: Exploring their relation before Bretton Woods," Explorations in Economic History, Elsevier, vol. 72(C), pages 38-56.
    13. Martin Ellison & Sang Seok Lee & Kevin Hjortshøj O’Rourke, 2020. "The Ends of 30 Big Depressions," Economics Series Working Papers 896, University of Oxford, Department of Economics.
    14. Samitas, Aristeidis & Polyzos, Stathis, 2016. "Freeing Greece from capital controls: Were the restrictions enforced in time?," Research in International Business and Finance, Elsevier, vol. 37(C), pages 196-213.
    15. Hu, Jiafei & Yuan, Haishan, 2021. "Interest arbitrage under capital controls: Evidence from reported entrepôt trades," Journal of Banking & Finance, Elsevier, vol. 127(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mitchener, Kris James & Wandschneider, Kirsten, 2013. "Capital Controls and Recovery from the Financial Crisis of the 1930s," CAGE Online Working Paper Series 132, Competitive Advantage in the Global Economy (CAGE).
    2. Nicholas Crafts & Peter Fearon, 2010. "Lessons from the 1930s Great Depression," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 285-317, Autumn.
    3. Maurice Obstfeld & Alan M. Taylor, 2017. "International Monetary Relations: Taking Finance Seriously," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 3-28, Summer.
    4. Eichengreen, Barry & Irwin, Douglas A., 2010. "The Slide to Protectionism in the Great Depression: Who Succumbed and Why?," The Journal of Economic History, Cambridge University Press, vol. 70(4), pages 871-897, December.
    5. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2018. "Taming the Tide of Capital Flows: A Policy Guide," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262037165, December.
    6. Wolf, Nikolaus, 2008. "Scylla and Charybdis. Explaining Europe's exit from gold, January 1928-December 1936," Explorations in Economic History, Elsevier, vol. 45(4), pages 383-401, September.
    7. Albers, Thilo & Uebele, Martin, 2015. "The global impact of the great depression," LSE Research Online Documents on Economics 64491, London School of Economics and Political Science, LSE Library.
    8. Richard S. Grossman & Christopher M. Meissner, 2010. "International aspects of the Great Depression and the crisis of 2007: similarities, differences, and lessons," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 318-338, Autumn.
    9. Martin Ellison & Sang Seok Lee & Kevin Hjortshøj O'Rourke, 2024. "The Ends of 27 Big Depressions," American Economic Review, American Economic Association, vol. 114(1), pages 134-168, January.
    10. Nicholas Crafts, 2014. "What Does the 1930s' Experience Tell Us about the Future of the Eurozone?," Journal of Common Market Studies, Wiley Blackwell, vol. 52(4), pages 713-727, July.
    11. Albers, Thilo Nils Hendrik, 2018. "The prelude and global impact of the Great Depression: Evidence from a new macroeconomic dataset," Explorations in Economic History, Elsevier, vol. 70(C), pages 150-163.
    12. Chokri Zehri, 2022. "Interaction Effect of Capital Controls and Macroeconomic Policies," Economic Papers, The Economic Society of Australia, vol. 41(1), pages 15-33, March.
    13. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    14. Binici, Mahir & Das, Mitali, 2021. "Recalibration of capital controls: Evidence from the IMF taxonomy," Journal of International Money and Finance, Elsevier, vol. 110(C).
    15. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126, Decembrie.
    16. Nicolas‐Guillaume Martineau & Gregor W. Smith, 2015. "Identifying fiscal policy (in)effectiveness from the differential counter‐cyclicality of government spending in the interwar period," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(4), pages 1291-1320, November.
    17. Bozhechkova, Alexandra (Божечкова, Александра) & Goryunov, Evgeny (Горюнов, Евгений) & Sinelnikov-Murylev, Sergey (Синельников-Мурылев, Сергей) & Trunin, Pavel V. (Трунин, Павел), 2017. "Capital Controls: World Experience and Lessons for Russia [Ограничения На Движение Капитала: Мировой Опыт И Уроки Для России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 8-43, April.
    18. Cantú, Carlos, 2019. "Effects of capital controls on foreign exchange liquidity," Journal of International Money and Finance, Elsevier, vol. 93(C), pages 201-222.
    19. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093, October.
    20. Andrés Fernández & Michael W Klein & Alessandro Rebucci & Martin Schindler & Martín Uribe, 2016. "Capital Control Measures: A New Dataset," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 548-574, August.

    More about this item

    Keywords

    Capital controls; Financial crises; Great depression; Interwar gold standard;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:10019. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.