The Impact of Bretton Woods International Capital Controls on the Global Economy and the Value of Geopolitical Stability: A General Equilibrium Analysis

This paper quantifies the positive and normative impacts of Bretton Woods capital controls on global and regional economic activity. A three-region DSGE capital flows accounting framework consisting of the U.S., Western Europe, and the Rest of the World (ROW) is developed to quantify capital controls and evaluate their impact on the world economy. We conduct counterfactual analyses that eliminate Bretton Woods’ capital controls and find these controls substantially reduced global capital flows, had large negative welfare effects on the U.S., raised welfare substantially in the ROW, and increased world output modestly. Given the U.S.’s goal of restricting capital flows to keep capital within ally countries to support their political stability, we interpret lower U.S. welfare arising from Bretton Woods as an estimate of the cost the U.S. was willing to pay to promote this stability during the Cold War.