The Political Economy of International Capital Mobility by Matthew Watson (auth.)

By Matthew Watson (auth.)

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My preference is to treat capital mobility more generically as any instance in which a related pair of actions can be observed: an investment is initially liquidated in one form and then the capital released in this way is subsequently redeployed to finance a different investment. Feldstein and Horioka’s example clearly meets this standard, in that a cash-based investment position is liquidated for the specific purpose of taking an alternative investment position in the productive economy. Yet, this does not exhaust all the ways in which capital can be considered mobile.

Feldstein and Horioka did not expect for the evidence to reveal that the correlation between domestic savings and domestic investment no longer held at any level, given how demanding the standard of perfect capital mobility is. But they did expect to see a weakening correlation between domestic savings and domestic investment, as this would have been consistent with increasingly integrated national economies. In fact, though, they found that neither the strength nor the statistical significance of that correlation had been diminished by the relaxation of capital controls in the mid-1970s (1980: 321).

In turn, this prevented creditors from taking the full hit of the devaluation and stopped them from feeling the need to lobby quite so aggressively for their interests to be defended by the increasing constitutionalisation of monetary orthodoxy. Now, by contrast, the full effects of price volatility on financial markets is usually made manifest in no more than a matter of hours, sometimes over a matter of days, and hardly ever over a matter of weeks as in the Bretton Woods era. , Budd 1999). The Bretton Woods system used formal controls on the liquidation of existing positions to act as an institutionalised set of firebreakers, which were designed to slow the speed at which financial risks were exposed.

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