CEU eTD Collection Dissertation submitted in partial fulfillment of the requirement partial of in the fulfillment Dissertation for submitted Global ImbalancesHistoricalPerspectivefrom the Global Department of International and Department Relations European Studies of Doctor of Philosophy in Political SciencePolitical Doctor of Philosophy in Central European University Supervisor: Julius HorvathSupervisor: Julius Budapest, October 2010 Word count: 88101 count: Word Marcela Veselkova Marcela Veselkova by by

the degree of of the degree CEU eTD Collection …………………….. Marcela Veselkova material authors. from or other ideas unreferenced doesfrom contains the thesis CEU towards nor knowledge To my a degree. noother to ins I submitted of have the thesis no that parts hereby declare been DECLARATION ii titution differenttitution CEU eTD Collection period developing ofcountries 1970-2007. the in pr the in short-run the in only holds latter the countries, developing hyp deficits twin globalizati eras of for both former holds But the exclusive. whereas the and glut savings global the that suggest Se population. the in persons dependent of proportion high and institutions financi developed with countries rich relatively to redistributed periods, both In similarities. several yielded has comparison The of period the for countries 107 and 1865-1913 of period the in countries 14 for t of determinants the investigates 6 ac Chapter tightening. monetary current the increase to possible is it short-run the in Thus, t determine income to shocks permanent the whereas balance, trade m the are income to shocks transitory the that suggest 5 Chapter gl of eras two in balances account current the of determinants determines latter The events. political and economic of course the the and imbalances account current the in changes traces former economet and narrative historical ofcombination the onthe dissertation relies acc current the determine that factors the examine to is aim the from imbalances global the examines dissertation This

iii Abstract historical perspective. The main main The perspective. historical ount balances. To this end, this this end, this To balances. ount ir reflex influence exerted on on exerted influence reflex ir ain source of variation in the in variation of source ain he current account balances account current he count balance by fiscal or or fiscal by balance count the short- and medium-run and short- the obalization. The results of of results The obalization. on and both developed and developed both on and othesis are not mutually mutually not are othesis al markets, high quality quality high markets, al he changes in the income income the in changes he the excess saving was was saving excess the e-War period and for for and period e-War cond, the results the cond, ric analysis. Theric analysis. 1970-2007. 1970-2007. CEU eTD Collection adventureLastlyway this in and helped moresister in have parents my my me Elkana,Fellowship, Write-Up Grant. and Rector’s Yehuda Univ European Central the from support financial acknowledge I Banca who kindly the d’Italia, data. provided Fe Niall Williamson, Jeffrey Taylor, Alan to grateful am I Budapestand the 5 2008, tak y uine a dprmna smnr, h 2 the seminars, departmental at audiences my thank I suggestionsearly dissertation. of at an this stage Eri and comments his for Merlingen Michael reader, second my thank politi international of field the in interest my sparked – Julius Greskovi Béla enjo and Csaba László have to also indebted I am I immensely. dissertation. this of drafts earlier helpful of very improvement with me provided and imbalances global on research inspired who Horvath, Julius supervisor, my to go thanks greatest My

th CEU Graduate Conference 2009. in Sciences Social in Acknowledgments iv nd Graduate Network Conference in in Conference Network Graduate gsn Mrt Shlrc, and Schularick, Moritz rguson, cal economy. I would like to to like would I economy. cal ersity, the CEU Doctoral Doctoral CEU the ersity, e wrig ih him with working yed ts, who – together with with together – who ts, n Jenne for her useful useful her for Jenne n ugsin fr the for suggestions e o odc the conduct to me s than I thans list. can CEU eTD Collection WOODS SYSTEM, 1945-1970 72 WOODSSYSTEM, 1945-1970 CHAPTERGLOBAL– 3 IMBALANCESUNDER THE BRETTON 38 CHAPTERGLOBAL– 2 IMBALANCES, 1914-1945 1 CHAPTERGLOBAL– 1 IMBALANCESUNDER PAX BRITANNICA INTRODUCTION 2.7 Conclusion 70 72 67 51 49 60 Political and Background Economic 3.1 Conclusion 2.7 38 Policy Response 2.6 Private CapitalFlows 2.5 Reparations 2.4 Debts War 2.3 British-American during Relations 2.2 theFinancial Political and Background Economic 2.1 1.4 Conclusion 35 Conclusion 1.4 1.3 Regional Distribution of Capital 20 5 RegionalDistribution ofCapital 1.3 Great Financialpre-War markets the in Britain 1.2 Political and Background Economic 1.1 1.3.8 Russia 33 32 30 31 27 23 21 Russia 1.3.8 Brazil 1.3.7 AfricaSouth 1.3.6 India 1.3.5 Australia 1.3.4 Argentina 1.3.3 Canada 1.3.2 StatesUnited 1.3.1 v

14 War 40 War 25 5

CEU eTD Collection WOODS PERIOD 100 WOODSPERIOD CHAPTERGLOBAL– 4 IMBALANCES THEIN POST-BRETTON- GOLD STANDARD 161 GOLDSTANDARD CHAPTER– 5 INCOME SHOCKS TO TRADE BALANCEUNDER TH

4.4 Global Imbalances 135 128 105 100 ImbalancesGlobal 4.4 World Developing 4.3 United andStates 4.2 Japan Recycling Petrodollar 4.1 3.6 Conclusion 97 83 73 80 Conclusion 3.6 ImpactBrettonof the Integration 3.5 the Woodson Policy Response 3.4 Balance-of-Payments Disequilibria 3.3 U.S. Financial Aid 3.2 5.5 Conclusion 179 161 175 169 158 Conclusion 5.5 The1957-2010 States, United 5.4 Results Data, and Methodology 5.3 under DemandShocks Gold and Standard Supply 5.2 Introduction 5.1 Conclusion 4.5 4.4.1 China 139 China 4.4.1 4.4.3 The United States 154 United The States 4.4.3 AccounCurrent FinancingU.S. Other Economies 4.4.2 4.4.1.3 Microeconomic considerations 149 149 142 145 considerations Microeconomic 4.4.1.3 considerations Macroeconomic 4.4.1.2 Trilemma to Solution 4.4.1.1 vi of Capital Markets 93of Capital t Deficit 151 tDeficit 163 E CEU eTD Collection B. APPENDIX TO CHAPTER 6 232 232 229 LISTREFERENCE TO 6 CHAPTER APPENDIX B. TO 1 CHAPTER A: APPENDIX

1970-2007 206 206 1970-2007 APPENDICES 229 225 APPENDICES CONCLUSION 181 PERSPECTIVE CHAPTERGLOBAL– 6 IMBALANCESFROM THE HISTORICAL 6.5. Conclusions and policy recommendations 22 Conclusions and recommendations6.5. policy 1913 192 181 183 Currentof the Medium-term Account Determinants 6.4 1913 ofthe acc The current medium-term determinants 6.3 Theoretical issues 6.2 Introduction 6.1 6.4.2 Robustness Tests 219 206 RobustnessTests 6.4.2 resultsEstimation 6.4.1 6.3.2 Robustness tests 203 194 Robustnesstests 6.3.2 Generalmodel 6.3.1 298 vii ount balance, 1865- ount balance, Balance, 1 CEU eTD Collection Table 5.1: Variance Decomposition, 1850-1913 171 171 134 138 from structuralTable factorization, United Variance Sta 5.2: decomposition 1850-1913 TableDecomposition, Variance 5.1: Table Balances Saving/Investment a 4.2: ofpercentage GDP as FiveTable in Net Flows 4.1: Asian Capital Economies Tables of List

210 209 177 215 218 208 excluding developing Africacountries Table Regressions, CA 6.10: 199 198 regressions countries) Table Current 6.9: (developed account Investment 1970-2007 Table 6.8: regressions, 201 Table 1970-2007 Savings 6.7: regressions, 197 201 regressions,Table Current 6.6: 1970-2007 account INVESTMENT onPOLITY2 on Table Effect 6.5: of conditional M2GDP INVESTMENTTable onM2GDP conditional Effect on 6.4: of POLITY2 Investment 1865-1913 Table 6.3: regressions, Table 1865-1913 Savings 6.2: regressions, Regressions, 1865-1913Table Current 6.1: Account from structuralTable factorization, United Variance St 5.3: decomposition viii ates, 1971–2010 tes, 1957–2010 176 CEU eTD Collection 173 179 178 1971-2010responses,Figure United Accumulated States, 5.3: 1957-2010responses,Figure United Accumulated States, 5.2: 136 ImpulseFigure 1865-1913 Responses, 5.2: selected in and regions, countries Figure 2000-2008 accounts Current 4.1: Figures of List ix CEU eTD Collection policy recommendations. According to the twin deficits hypothes deficits twin the to According recommendations. policy budge U.S. growing the and deficit account current U.S. the between global savings glut hypothesis suggests that it is theemeris it that suggests hypothesis glut savings global tighteni fiscal of cost the involves and States United the on rests 05 Blanchard 2005; a are markets financial liquid and deep whose States, United the to dir markets financial underdeveloped their with combined of countries excess the which to according hypothesis, glut savings global In 1998). Rogoff and (Obstfeld generations present to future from income def account current induce deficits budget government the that suggest current the of models intertemporal on draws argument This 2009). Ito 2006, Roubini and (Sachs savings public the in decrease a represents hypothes glut savings global the and hypothesis deficits twin the Legg Thus, emerging economies transferred net savings to advanced to economies.Thus, emerging transferred savings economies net a Asian East in surpluses account current growing the by mirrored def This 2009). (WEO 2006 in GDP of percent 6 or USD billion 803.5 astonishing Unit the economy, largest world’s the of deficit account current curr the in reversal unprecedented an witnessed decade past the fort economic and politics both affected imbalances significant

et al.et The current debate surrounding the global imbalances typicall imbalances global the surrounding debate current The lbl maacs r nt nw hnmnn Truhu te oen history modern the Throughout phenomenon. new a not are imbalances Global 2007; Prasad Prasad 2007; t al.et 05 Caballero 2005; et al.et 2006; Smaghi 2008). Thus, the two hypotheses yield different different yield hypotheses two the Thus, 2008). Smaghi 2006; INTRODUCTION t al.et 1 06 20, 09 Gue ad ai 2005; Kamin and Gruber 2009; 2008, 2006,

ging countries that are able to trigger trigger to areable that countriesging ed States, reached the low of low the reached States, ed ns f onre. However, countries. of unes 97 Ud 18, Roubini 1988, Ueda 1987, is, the burden of adjustment adjustment of burden the is, is. The former draws a link link a draws former The is. ent account financing. The The financing. account ent ng. On the other hand, the the hand, other the On ng. nd oil-exporting countries. oil-exporting nd ble to absorb it (Bernanke (Bernanke it absorb to ble ects these excess savings savings excess these ects savings in developing developing in savings y contrasts two views: two contrasts y icits by redistributing redistributing by icits contrast stands the stands contrast t deficit, which which deficit, t account, which which account, icit was was icit , CEU eTD Collection aacs rm h hsoia prpcie I dp te e C New the adopt I perspective. historical the from balances aimed policies development account and capital liberalization. the through adjustment imbalances global the exerted on the course of economic exerted onthe course and events. political of influence reflex the analyze and positions, investment international fl capital international net and gross by captured imba as account dimension, current the in changes trace therefore chapters c two nearly for imbalances global the of account comprehensive inform current debates tren rather thanfocusing by short-term onlong-term beli the by motivated is approach This 1).” 2007, Taylor and O’Rourke regions, time, c across experiences comparing systematically processes economic that belief a “reflects which approach, mrig cnme jie te nentoa eooy I te pre-Wa the In economy. international the joined economies emerging use commercial widespread the or internet the railway include they telephone, nowadays telegraph, included these past, the In di markets. connected which technologies, transportation and telecommunication new i This flows. labor and capital trade, through economy national international of integration unprecedented an saw eras Both present. the usef draw to allows which resemblance, their by motivated thus under periods the of choice The 2004). Taylor and Obstfeld 1999, Williamson and 1995, Warner and Sachs (see globalization of eras two the as to c are which 1970-2007), and (1865-1913 periods two in imbalances global h dsetto cnit o tre necnetd at. is p First parts. interconnected three of consists dissertation The This dissertation contributes to this debate by examining the det the examining by debate this to contributes dissertation This The second and the third part of the dissertation analyze the main main the analyze dissertation the of part third the and second The 2

and, above all, countries (Hatton, countries all, above and, omparative Economic History History Economic omparative Williamson 1996, O’Rourke O’Rourke 1996, Williamson ul lessons from the past for for past the from lessons ul an best be understood by by understood be best an acs n ter financial their and lances that the global imbalances imbalances global the that ntegration was brought by brought was ntegration w ad h bidu of build-up the and ows at the financial market market financial the at nuis Te is four first The enturies. r ses o rvd a provide to seeks art ad ta vessels; steam and s erminants of external of erminants cnme it the into economies r period, these were were these period, r f ipae. New airplanes. of ef that history can can history that ef ds (ibid, 2). (ibid, ds ommonly referred referred ommonly eemnns of determinants stant world world stant study was was study CEU eTD Collection oh eid wtesd nraig aia mblt ad financi and mobility capital increasing witnessed periods both emnn ad rnioy noe hcs o h tae aac ae cons are balance trade the to shocks income transitory and permanent aac. hpe 5 oue o te hr-em lcutos n h tr the in fluctuations short-term the on focuses 5 Chapter balance. replicate.the to current eraand impossible N the of territories empty vast to World Old the from migrants charact was period prewar the Furthermore, currencies. their the of part significant a whereas rates, exchange flexible gra countries developed the of most system, t monetary of international collapse the Following policy. monetary independent of cost the rates exchange fixed the on rested period prewar the of standard dif was periods two the in trilemma the to solution the 2004), Taylor geographicallyeconomy and former were Eastern mostly Asia in located b that countries the globalization, of era second the In Argentina. States, United the as such World, New the of countries the mostly 2 srcua fcos ht xli mdu- o ogrn movements long-run to medium- explain that factors structural (2) fluct short-run explain that factors cyclical (1) groups: two The balances. external the of determinants main the examine I era two in same the balances,were account current the thus and and savings the determining forces whether ask may we words, other not are imbalances global the of explanations and models current ugs te oiac o tastr oe praet hcs o noe n de in income to shocks permanent over transitory of dominance the suggest effect income the on is emphasis The 2010. of quarter first the to 1957 in balance trade U.S. the and 1865-1913 of period the in countries European However, one should be cautious about the differences between two peri two between differences the about cautious be should one However, ie tee iiaiis a wl a dfeecs i i of is it differences, as well as similarities, these Given 3

developing world continued to peg peg to continued world developing uations in external positions; and positions; external in uations erized by significant flows of of flows significant by erized ew World. These are absent in in absent are These World. ew s of globalization. To this end, this To globalization. of s determinants are separated to separated are determinants interest to test whether the the whether test to interest l nerto (bted and (Obstfeld integration al and free capital mobility at at mobility capital free and time- or place-specific. In place-specific. or time- ferent. The classical gold classical The ferent. joined the international international the joined f h cret account current the of dually moved towards towards moved dually ade balance of seven seven of balance ade Canada, Australia, or or Australia, Canada, investment balances, investment loc. loc. drd Te results The idered. e rto Woods Bretton he ad hs only thus and s the period from period the ods. Although ods. emnn the termining CEU eTD Collection eid f 9020, h ti dfct hptei hls etr o develo for better holds hypothesis deficits twin the 1970-2007, of period short- the in only balance account current the on effect positive governm the period, pre-War the In hypothesis. deficits twin the results The periods. both in surpluses) lower (or deficits account and r tend to of high persons dependent proportion markets, quality high institutions wit countries rich relatively that suggest results The 2007. through of period the for developing) 86 and developed (21 countries 107 and 1913 through count 14 hyp of comprised glut dataset the savings upon relies global analysis empirical the and deficits twin the on focus main the wit 1996), Faruqee and Debelle and 2007a; Ito and Chinn 2007, Chinn and Ito 2003; Prasad em previous the on draws It approach. different a adopts chapter transitory of sources various between differentiate to allow now results of under the for As the periods study. both trade fluctuations balance glut are hypothesis exclusive. mutually not h deficit twin the that suggest results These incorporated. are role the plays balance budget government the countries developed of the short-run fluctuations in the current account balance documented documented balance account current the in fluctuations short-run the of

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ypothesis and the global savings savings global the and ypothesis run, suggesting the importance importance the suggesting run, provide mixed evidence for evidence mixed provide ries for the period of 1865 of period the for ries n bde blne a a had balance budget ent pirical works (Chinn and and (Chinn works pirical noe hcs te final the shocks, income only when bond markets markets bond when only h developed financial financial developed h in Chapters 5. In the In 5. Chapters in tei. gi, the Again, othesis. se two chapters do se twochapters do ig onre. In countries. ping un current un current 1970 h h CEU eTD Collection capit of paradox classical the to support empirical giving 2008), Schularick 2004; Williamson and (Clemens countries rich relatively these of majority The debtor. largest the being Russia with most capital the exported Germany and France Britain, Great I 384). 1985, (Fishlow years peak the during investment U.S. the of percent 15 The f accounted lending 1999). foreign However, States. Stone United the was (see importer Empire the within and World New the in mostly Political and Background Economic 1.1

world. Europ book, (1930) Feis’s of title the by indicated As 1). Table invest the foreign total world 1914, the of quarters three in almost for accounted Overall, (ibid). GDP of percent 2 exported latecomer, a (ib 1910-13 in surge final the for and average on both levels, British France of exports capital The 384). 1985, (Fishlow war of outbreak perce 10 of peak reaching 1913, and 1873 between GDP of percent 5 abroad largest the Britain, portfolios. their in positions one-way enormous France Britain, principally nations, creditor key era, pre-1914 the Methodology and Research Design in the Social Scien theSocial in Design Research and Methodology 1 An earlier draft of this chapter was presented 2 presented was chapter this of draft earlier An This chapter discusses the global imbalances during the firs the during imbalances global the discusses chapter This h cptl xot wr drce t vros ol rgos Grea regions. world various to directed were exports capital The CHAPTERGLOBAL– 1 IMBALANCESUNDER PAX

BRITANNICA nd Graduate Network Conference: Understanding Complex Understanding Conference: Network Graduate ces, 11.12.2008-14.12.2008, Budapest. 11.12.2008-14.12.2008, ces, 5

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ly to their colonies and Europe, Europe, and colonies their to ly capital flows were directed to to directed were flows capital e was a true banker of the the of banker true a was e and Germany, developed developed Germany, and ls alr t fo from flow to failure al’s capital exporter, invested exporter, capital id). Germany, which was was which Germany, id). and Steger 2008; Esteves Esteves 2008; Steger and t era of globalization. In globalization. of era t averaged roughly half of of half roughly averaged ment (Esteves 2008, 31, 2008, (Esteves ment or no more than 10 to to 10 than more no or e he countries three se Bian invested Britain t nt just before the before just nt ags capital largest n contrast to to contrast n ity – – ity CEU eTD Collection period of 1815-1914. They argue that since news events and macroeco and events news since that argue They 1815-1914. of period powerful influence over globalpowerful politics. influence over outsi the to excess Europe’s continental deny to it enabled points Britannica since 1729, Brown 1729, since behavi the of study the on based example, For environment. supportive sta financial the affecting positively way this investment, account for this period of reduced volatility, underlying political political underlying volatility, reduced of period this for account identifie 143-154) (1971b, Hartwell by inspired 6), over control its and supremacy naval British Second, role. mediating Britain allowing rivalries, their by check in powers continental redistrib the First, 81-82). 1975, (Gilpin elements two upon rested established order international Thewars. Napoleonic the victory in 1990). countries to ratios capital/labor high relatively with countries importance of the growth in the national income or or income national the in growth the of importance ca of produc where rise railroads, and mines mills, industrial the firm, the of scale and structure the sta The production. i. of factors place, and goods in took markets people between transactions (To economic School Change Social The revolution. industrial coincided with with coincided half than more coal, world’s the of two-thirds about produced France, isla little The world.” the of “workshop true a was Britain 2 supremacy. ial, h Tcnlgcl col oue o invent on focuses School Technological the Finally, argues that changes in technology were primary to a to wereprimary in technology thatchanges argues There are several competing explanations of the or the of explanations competing several are There h pltcl tblt during stability political The h etne cei o Get rti, rne n Gray o t to Germany and France Britain, Great of credit extended The In addition to the naval supremacy, supremacy, naval the to addition In seems to be a more likely explanation. more seemsexplanation. be to likely a 2 When Queen Victoria opened the Great Exhibition in the Crysta the in Exhibition Great the opened Victoria Queen When Pax BritannicaPax et al.et (2006) identify a greater-than-50 % decline in volatility during t during volatility in decline % greater-than-50 a identify (2006)

, a period of relative peace in Europe, following the Britain’s Britain’s the following Europe, in peace relative of period a , a BritannicaPax tion was managed. The Macroeconomic School highligh School Macroeconomic The managed. was tion iait mlyet n eetal fcoy system, factory eventually and employment pitalist Pax Britannica Pax ll other changes (Landes). changes(Landes). other ll igins and sources of the industrial revolution. Mok revolution. industrial the of sources and igins rting point of Industrial Organization School (Mant School Organization Industrial of point rting fu dfeet col o togt n h origins the on thought of schools different four s h rt o cptl omto (otw Dae n Co and Deane (Rostow, formation capital of rate the o ad ifso o nw ehooia kolde an knowledge technological new of diffusion and ion ne o Plni epaie te hne i te way the in changes the emphasizes Polanyi) or ynbee 6 . mrec o fra, opttv, n impersonal and competitive, formal, of emergence e.

decreased the political risks to to risks political the decreased rested also on the British industrial industrial British the on also rested iiy n cetn a investment- an creating and bility nd, with a population half that of that half population a with nd, with relatively low ratios (Lucas (Lucas ratios low relatively with by the Congress of Vienna Vienna Congressof the by to play a balancing and and balancing a play to de world and exercise a a exercise and world de nomic variables cannot cannot variables nomic to o trioy kept territory of ution the strategic control control strategic the of its iron and cotton and iron its of e et f h world the of rest he stability under under stability or of consol returns consol of or l Palace in 1851, in Palace l yr (1993, (1993, yr such as as such oux) is oux) of the the of ts the the ts Pax Pax le). le). he d d

CEU eTD Collection positive balance of trade and the inflow of the bullion. In sharp sharp In bullion. the of inflow the and trade of balance positive per capitaper other cases, led by an invisible hand to promote an promote to hand invisible an by led cases, other manner as its produce may be of the greatest value, greatest the of be may produce its as manner intends he industry, foreign of that to domestic of

0.92 (US) 1913(Krasner in 1976,333). 1900and US) in (1899 (US) 1880, 1.05 in 1860,1.30 in highest 0.91(US) income next was to and Dyster 1999,40). saf for all, above looking, were who and networks financial Britain’s rela their ve channeled who upper-class or middle the being of members people these of proportion small a only with investors, numerical but small, a of hands in capital of accumulation the was niiul tyn t mxmz ter niiul eeu bnft a benefits revenue individual their maximize to trying individuals which in market, free of favor in argued liberals classical neither intends to promote the public interest, nor interest, public the promote to intends neither annual the render to labors necessarily individual that direct to so and industry, domestic of support i e favored barriers, trade which other of and tariffs use aseconomy, the such state protectionist favored they Therefore, bullion. of accumulation of prosperity the that believed Mercantilists mercantilism. therefore, individual, every As value. exchangeable produce annual whole the of value theexchangeable Br 333). 1976, (Krasner 1913 in States) United (the 1.20 and 1900 in Germany) 2.17 1880, in (France) 2.22 1860, in (France) 2.01 was highest next to trade world The trade. world the dominated it decades, few For 124). 2003, (Landes cloth 9 average, 1913 area) (Landes 2003, 124). Globally, the ratio of British va British of ratio the Globally, 124). 2003, (Landes area) 1913 average, 9 (1860 Germany for ₤13.3 and (1859), France for ₤21.1 Kingdom, United the for ₤32.6 about 3 Smith (1776, Vol. 4, Chapter 2) observed: “But the “But observed: 2) Chapter 4, Vol. (1776, Smith From the point of view of this study, an important effect of the i the of effect important an study, this of view of point the From The movement of the accumulated capital was eased by the victory the by eased was capital accumulated the of movement The was higher than that of its continental neighbors. In 1860 In neighbors. continental its of that than higher was

knows how much he is promoting it. By preferring t preferring By it. promoting is he much how knows revenue of the society as great as he can. He gener He can. he as great as society the of revenue only his own security; and by directing that indus that directing by and security; own his only industry that its produce may be of the greatest v greatest the of be may produce its that industry end which was no part of his intention. Nor is it is Nor intention. his of part no was which end endeavors as much he can both to employ his capita his employ to both can he much as endeavors he intends only his own gain, and he is in this, a this, in is he and gain, own his only intends he annual revenue of every society is always precisel isalways society every of revenue annual of its industry, or rather is precisely the same th the isprecisely rather or itsofindustry, 7

rational behavior of self-interested self-interested of behavior rational tively modest savings through through savings modest tively h cuty et uo the upon rests country the otat Sih n other and Smith contrast, e investments (Meredith (Meredith investments e y elh: ot were most wealthy: ry per capita capita per oit a a whole. a as society y nraig cas of class increasing, ly tretos n the in nterventions ndustrial revolution ndustrial of liberalism over liberalism of xports and led to a and a led to xports lue of lue British share of share British itish income income itish income was income ing with that withthat ing try in such a a such in try per capitaper ally, indeed, indeed, ally, alue; every every alue; always the always he support support he s in many many in s y equal to to yequal l in the the in l (1890 3 -

CEU eTD Collection between Great Britain and France in 1860. The Treaty provided that provided Treaty The 1860. in France and Britain Great between pamphlets or public meetings, and attacks on the government.the on attacks and meetings, public or pamphlets proven also by the 1849 repeal of the Navigation acts restricting acts Navigation the of repeal 1849 the by also proven eas fe tae truh tmlto o cmeiiees n innova and competitiveness of stimulation through trade, free because very few words need be employed in dissuading them them dissuading in employed be need words few very an is It good. public the for trade to affected who intend really he when than effectually more society (Encyclope Britain Great into wines except products French years five within percent 25 of maximum a to reduced be to were Cobde the or colonies its and Britain Great between trade and power 1997). to come had Cor the maintaining of he platform a on repeal, 1841 in government the Conservative/Tory of favor in was Peel Robert 6 5 4 B it. of part not was it that society the for worse customs tariffs, of removal the of favor in argued they Therefore, economic growth.economic apin o te eel f h Cr Lw, hc icue propaganda included which Laws, Corn the of repeal the for campaign ACLL The Manchester. in founded was (ACLL) League Anti-Corn-Law and 1815 between competition foreign the against corn British domestic ta import the Laws, Corn the of repeal the with century the of hig the influence significantly to started they However, century. repeal of the Corn Laws was passed.was Laws Corn the of repeal agai was party his of majority the because ministry the him the that knew Peel Although famine. potato Irish the of start As a consequence, the next bill was voted down and down was voted bill next the As consequence, a som on tariffs reduced Peel solution, As partial a b formed was anAnti-League 1844 in As reaction, a 5 Peel was therefore able to push for the repeal of the Corn L Corn the of repeal the for push to able therefore was Peel The ideas of Smith and later proponents of free trade became trade free of proponents later and Smith of ideas The 6 The victory of liberalism in the domestic politics was politics domestic the in liberalism of victory The y pursuing his own interest he frequently promotes promotes frequently he interest own his pursuing y e goods in 1842. 1842. in goods e affectation, indeed, not very common among merchan among common very not indeed, affectation, s to promote it. I have never known much good done done good much known never have I it. promote to s Peel resigned. resigned. Peel y landowners who wanted to retain the Corn Laws. Laws. Corn the retain to wanted who ylandowners from it.” it.” from 8

repealing of the laws would cost cost would laws the of repealing nst the repeal, in May 1846, the 1846, May in repeal, the nst dia Britannica, undated). France undated). Britannica, dia 4 Although the Prime Minister Prime the Although riffs supporting the prices of of prices the supporting riffs h politics only in the middle middle the in only politics h the use of foreign shipping shipping foreign of use the n-Chevalier Treaty signed signed Treaty n-Chevalier French protective duties duties protective French dominant over the next next the over dominant , with free entry of all all of entry free with , aws only following the following only aws n ohr restrictions other and as the head of a a of head the as 1846. In 1838, the 1838, In 1846. in las o the to leads tion, n h fr of form the in led an intense intense an led n Laws (Bloy (Bloy Laws n that of the the of that by those those by ts, and and ts,

CEU eTD Collection balance was sustained mostly due to the export of services, predom services, of export the to due mostly sustained was balance u as pltcly Te ot motn mmn ws h Franco the was moment important most The politically. also but personnel did not tend to change from one house to to house fromone change to tend not did personnel 1999, 10). Ge and t nor Belgium spent be should loans the of proceeds the how to as stipulations France, to contrast in loans government of floatation we there below), (see China and Turkey as such exceptions the With treaties,relatively trading leading system. free a to international by followed was treaty trade free This 1892. in treaty the ended twice as much steel as the German the as steel much as twice f making was Britain 1870s, early the In steel. and iron industry, i Unite Britain Great of the decline industrial relative and of illustration Germany especially countries, other of competition Bri Great revolution, industrial of spread the to Due changes. economic started to develop a complex services sector.startedcomplex develop to a economi of stage advanced more a to moved Britain Great as shipping, and positi The 1913. in sixth a to 1880 in quarter a from fell trade world (ibid). States United the bysteel and iron of producer one number was Britain Great 1890 In 269). 2003, (Landes iron) pig for 1903 steel, for (t steel much as twice than more and iron much as twice almost 7 balance continental The 1871. in Germany of unification the to leading akt tee a a asne of absence an was there market, utmr;rte,crancutisad geographic and countries certain rather, customers; oee, tn (99 1) rus ht ept mini despite that argues 11) (1999, Stone However, h gvrmn apid the applied government The h ls tid f h nntet cnuy a mre b signifi by marked was century nineteenth the of third last The Second, Britain’s power did not decline relatively to its main riva main its to relatively decline not did power Britain’s Second, 7

laissez-faire

Zollverein laissez-faire laissez-faire eas mrhn bnes i nt opt wt each with compete not did bankers merchant because another. another. regions were clients of particular merchant banks banks merchant particular of clients were regions 9 ; in the period of 1910-14, Germany produced Germany 1910-14, of period the in ; a gvrmna itreec i te odn capital London the in interference governmental mal

philosophy also to the foreign investment. investment. foreign the to also philosophy te eeomn i Biih flag British in development the s

he point of passing was 1893 was passing of point he our times as much iron and and iron much as times our As a result, British share ofshare British result, a As inantly financial services services financial inantly Pusa Wr f 1870, of War -Prussian o their remittance (Stone remittance their o tens of similar bilateral bilateral similar of tens re no restrictions on the the on restrictions no re tain had to face rising rising face to had tain of power shifted and shifted power of ls only economically economically only ls d States. The best best The States. d ve current account account current ve c development and and development c cant political and and political cant rmany, nor any any nor rmany, surpassed as the the as surpassed other for for other and the the and

CEU eTD Collection perceived by investors. The “empire effect” enabled British enabled effect” “empire The investors. by perceived ond y h Uie Sae ad aa, o ivle i a etnie st extensive an in involved got Japan, and States United the by joined y 90 h Biih mie oee oeffh f h ln ae of area land the of one-fifth covered Empire British the 1900 by power after the unification of Germany (Cohen 1973, (Cohen Germany of unification theafter power became frozen, especially because of the German annexation of m of annexation German the of because especially frozen, became uig h pro 18 t 11 te ooil tts infcnl rdcd the reduced significantly status colonial the 1913 to 1880 period the during Schularic and Ferguson example, For default. sovereign as such risks, a such risks, political it be investors, by perceived risks the Austra or States United B the Africa, in diamonds and gold the of discovery for opportunities investment new provided territories new of sustainabil the or adherence standard gold either than more mattered of because noncolonies than interest of rates lower significantly imperialism” arose in reaction to the changes in th in changes the to reaction in arose imperialism” contrast In 34-72). 1973, Cohen see theories, these ntd tts ruh cags n oh h Biih nentoa and international British rise the to led countries amongthe competition the Internationally, the both in changes brought States United Great Britain and continental countries (France, Russia and unified and Russia (France, countries continental and Britain Great – some 4.75 million square miles populated by an estimated eighty estimated an by populated miles square million 4.75 some – B history. in empires greatest the establishing territories, something like one-quarter of its population (Cohen 1973, 29-30). (Cohensomething population 1973,29-30). of one-quarter like its

materials or the new markets. These material needs needs material These markets. new the or materials material the on mostly focusing system, capitalist represented liberal or Lenin by represented marxist the continental powers, suddenly found it difficult to perform this function (Cohen 1973, 77). (Cohenthe continentalperform difficult 1973,77). to powers, it function this suddenly found balancer a as acting previously Britain, War. the in Lorraine 8 There are several competing explanations of the ri the of explanations competing several are There The Empire influenced the British capital exports in a twofold a in exports capital British the influenced Empire The The economic and political rivalries among Great Britain, conti Britain, Great among rivalries political and economic The

, political explanations are based on the premise t premise the on based are explanations political , by Hobson, are based on the assumption of some fla some of assumption the on based are Hobson, by needs of the capitalist countries, such as need for need as such countries, capitalist the of needs se of the “new imperialism.” Economic explanations, Economic imperialism.” “new the of se e political system, especially the changes in the b the in changes the especially system, political e lead to the rush for colonies (for an illuminating illuminating an (for colonies for rush the to lead 75-80). 75-80). 10

ritain acquired the most new territory territory new most the acquired ritain s military conflicts, or economic economic or conflicts, military s colonies to borrow in London at London in borrow to colonies within the shifting alliances of of alliances shifting the within their colonial status, which status, colonial their of the “new imperialism.” “new the of ost of Alsace and parts of parts and Alsace of ost -eight million people and people million -eight Germany and Italy), later later Italy), and Germany the globe and included included and globe the ity of fiscal policies. On On policies. fiscal of ity way. First, exploration First, way. lia. Second, it reduced reduced it Second, lia. nental powers and the and powers nental k (2006) suggest that that suggest (2006) k ritish investors, e.g. e.g. investors, ritish oetc politics. domestic ruggle for the new new the for ruggle default risk risk default hat the “new the hat cheap raw cheap critique of of critique alance of of alance w in the the in w such as as such 8

CEU eTD Collection rd eegd Atog te eea cus o the of course general the Although emerged. trade military upon resting empire, strong a for calls diplomacy, relati Britain’s Facing politics. domestic British the within ay f hc h rgre “s en i te odto o underdeveloped of condition the in being “as regarded he which of many develo of policy a to himself pledged publicly Chamberlain 1895 w Within Secretary. Colonial the of position his through Chamberlain capital. the of course the over influence political the of execution the to out were there and politicized highly became investments capital (1983). Asian colonies. basis 175 to up rising points, basis 100 around was discount a average, African countries, which could significantly alter the results. African results. couldcountries,alter significantly which the a include not did sample their (2006), Schularick and Ferguson to compared economic any for control not 2004, do Williamson and (Clemens fundamentals geographic or demographic Rockoff and Bordo However, standard. gold the on l points basis 40 be would bond gold a on rate the equal, things other from borrow could countries peripheral which at terms the improved 1914signific to from the 1870 period gold in adherence to the successful Theyargue that housekeep “good a as standard gold the of importance the emphasize the systemic through Acts. Stock intervention the Colonial of bailout the reasons, political the to due interventions governmental 9 For the discussion of the interaction between Brit between interaction the of discussion the For 9 hs td i i cnrs wt te ocuin o Bro n Rcof (1996) Rockoff and Bordo of conclusions the with contrast in is study This The changing structure of international economy and politics brought brought politics and economy international of structure changing The h ms aprn itretos n h cptl oeet r toe of those are movement capital the in interventions apparent most The hs icue h ifune xrie b te ooil Secretary Colonial the by exercised influence the include These

ish overseas investment and the “New Liberalism,” s Liberalism,” “New the and investment overseas ish 11

laissez-faire laissez-faire strength and imperial preference in in preference imperial and strength e eln i wrd akt and markets world in decline ve several episodes, which point point which episodes, several pment in the crown colonies,crown the in pment oiis i nt change, not did policies ower if the country were were country the if ower movement of the British the of movement the Baring Brothers or or Brothers Baring the eeks of taking office in in office taking of eeks the core countries. All All countries. core the n elo approval.” of seal ing points for African and and African for points 333). Furthermore, Furthermore, 333). sae” o be to estates” changes also also changes y sa or Asian ny , sporadic sporadic , Joseph ee Offer Offer ee antly antly who who , , CEU eTD Collection participate in the financing and operation of the line (Feis 1974, 89) 1974, (Feis line the of operation and financing the in participate Will (1970). (1970). Will 316). t protected and colonies crown the for representative financial and serve which body (quasi-governmental colonies the for agents crown and the on entirely almost depended projects these of success the betw stock railway inscribed colonial of sale the beset which West the in apparentbest the is flows capital of direction majori the persuade to ability his as well as Germany, commerc for scheme a to opposition resulting the and manufacturers protec of advocacy Chamberlain’s namely factor, important more and ther that argues (1973) Francis Parliament,press withdrawal and the shown in opposition the behind reason the that suggests (1974) Feis Whereas tha banks British those of withdrawal the by followed was which move, f support its withdrew 1903 in Government British the negotiations, the after dr and ofgiven indications interest, many previously However, after power single a by guarded or controlled be would it of part no that a upon placed be should line “the that view the on grou based enterprise German the with negotiate to decided Britain built, be would it Once Gulf. Persian the to Constantinople from Turkey, across project a was scheme Railway Bagdad The 1973). Francis and 342-360; Railway Bagdad the from support Governmental the of removal sudden Indies. West and Africa on mostly focused support 131). 1970, Britishmoney(Will of investment judicious the “bydeveloped 10 For a closer account of Chamberlain’s involvement involvement Chamberlain’s of account closer a For Government intervened only sporadically (see Feis 1974). One of the e the of One 1974). Feis (see sporadically only intervened Government

12 in Africa, see Dumett (1975) and in the West Indies West the in and (1975) Dumett see Africa, in

10 ty of his colleagues that the proposed proposed the that colleagues his of ty hmeli’ itreec i the in interference Chamberlain’s African railway finance. Difficulties Difficulties finance. railwayAfrican een 1898 and 1905 illustrate that illustrate 1905 and 1898 een backing of the Colonial Office Colonial the of backing was clear that the railway railway the that clear was (Francis 1973, 170-171).” 1973, (Francis erritories) (Dumett 1975, (Dumett erritories) . The explanations vary. explanations The . n international basis, so so basis, international n tion against continental against tion p to take part in the the in part take to p ial co-operation with with co-operation ial awing the banks into into banks awing the d as the commercial commercial the as d scheme (Feis 1974, 1974, (Feis scheme ih b a strong a be might ” The development development The ” o te rjc, a project, the rom t had arranged to to arranged had t o ul a trunk a build to e is an additionalan e is pisodes was a was pisodes , see see , CEU eTD Collection presented for payment (Clapham 1944, ii, 332, cited in Ferns 1960, 436). The p The 436). 1960, Ferns in cited 332, ii, 1944, (Clapham payment for presented pressure on the Chinese government (Edwards 1928, 686). As a result, only 4 only result, a As 686). 1928, (Edwards government Chinese the on pressure olpe oprd o hc ta o 16 wud i te pno o te Chancel the Exchequer, a “be 1960,436).” trifle (Ferns of opinion the in would, 1866 of that which to compared collapse sd o fet h mvmn o Biih aia, aey h Coloni the namely capital, British of movement the affect to used was never issued. was never issued. and of disposed be could Crisp by London in offered installment first radical departure from the accepted rules of a of rules accepted the from departure radical B of signature the honor to continuing by incurred be might which loss England of Bank the 1890 of Governor the November with secretly 14 agreed Government On below). Argentina in investment British on section overview the (for outs bail coordinated first the of one Brothers, ald n h Frin fie n ifre i o te on h ws infor was he c they loan, but syndicate Crisp the the on pressure of a put not it would Government informed and Office Foreign the on called Cr When 1971). Chan and 1928; Edwards 430-462; 1974, (Feis Government the of support loa a provide to Consor International the than terms favorable more a under attempted Government Company and Crisp Birch C. of firm London the Deutsche with Bank (Feis arrangedfor cooperation 1974,90) in the Turkish Government withdr to Turkey of Bank National founded newly the of head the to induced in Turkey with negotiations financial in intervened Office Foreign pro the to capital British of entry the prevented government the de next the For equality. for demand British the meet not did scheme In addition to the above mentioned one-time interventions, a more syste more a interventions, one-time mentioned above the to addition In One of the most interesting governmental interventions was the bai the was interventions governmental interesting most the of One The most obvious intervention of the British Government appeared in 1912, in appeared Government British the of intervention obvious most The 13 laissez-faire

economy was to avoid a financial financial a avoid to was economy of the Baring crisis, see the the see crisis, Baring the of ject and at least once, the the once, least at and ject al Stock Acts (especially (especially Acts Stock al other projects, when it it when projects, other cade, the opposition of opposition the cade, the second installment second the aring Brothers on bill on Brothers aring tium with the official the with tium ould and would put would and ould to bear half of any any of half bear to l out of the Baring the of out l 0 percent of the of percent 0 aw from a loan loan a from aw e ta the that med t Chinese to n mic tool was tool mic urpose of so of urpose the British British the o o the of lor when the when isp isp . . CEU eTD Collection the detailed history of the London Stock Exchange, Exchange, Stock London the of history thedetailed Britain to the rest of the world. the of rest the to Britain Great Financialpre-War markets the in Britain 1.2 B the steadily(Stone 1999,12). after 1900 for destined exports capital British of proportion the 1914, nearly obligations Provincial and Colonial Empire for capital the although that bonds noted be the must it which However, compete. within not could market governments strong a them provided This institutions. purcha became They status. “trustee” given– conditions certainupon domini and colonial British the of securities the this, achieve To 95). and dominions British the towards capital the directing by dominions the of development economic the promote to was aim Their revision). 1900 11 fr fleeing Huguenots, and Jews predominantly merchants, of inflow the in established centers financial and trade the of disorganization instability political the in resulting events, these of All 33). at defeat Napoleon’s with ending wars, Napoleonic the and troops Re Ams of occupation 1795 Exchange, Stock 1789 Paris the of closing 1793 France, the were crucial most The 33). 18, 1999, (Michie Britain of outside l financial the to led that events the transferable, was that c borrowed by time first the forgovernment British the when 1693 in For the discussion of British overseas investment investment overseas British of discussion the For British capital market played an important role in the tra the in role important an played market capital British

11 Although the foundation for the securities market took place took market securities the for foundation the Although see Michie (1999, 15-142). (1999, Michie see with the focus on European European on focus the with 14

eadership of London happened happened London of eadership in the continental Europe and and Europe continental the in nsfer of the capital funds from from funds capital the of nsfer the previous centuries, led to to led centuries, previous the obe bten 90 and 1900 between doubled émigrés reating a permanent debt permanent a reating sable by trust bodies and and bodies trust by sable Waterloo in 1815 (ibid, (ibid, 1815 in Waterloo colonies (Feis 1974, 92- 1974, (Feis colonies on governments were – – were governments on ritish Empire declined declined Empire ritish , see Cottrell (1975). For (1975). Cottrell see , terdam by French French by terdam om the religious religious the om oois and colonies ouin in volution of foreign foreign of volume of of volume CEU eTD Collection escto, n ohr wo osse wat, o London. to wealth, possessed who others and persecution, between 1870 and 1914, new forms of financial institutions emerged, su emerged, institutions financial of forms new 1914, and 1870 between instead of the transport of the precious metals by each transa each by metals precious the of transport the of instead b final the of settlement the for allowing debits, and credits develop the to led which trade, international the by required credit countr more or two in operations and connections with bankers, Merchant internat the as London of establishment the to contributed they First, The family and religious ties of European European of ties religious and family The the eliminated. nineteenth was century capital British the to competition The 17). 1975, (Cottrell standing rega capita be never to continue did Frankfurt-on-Main center, and Paris though importance, financial previous the Amsterdam, that, to addition involvement allowed which family-ties,important and skills wealth, gold were the Raphaels, as Amsterdam Jews, Nathan R Nathan Jews, Amsterdam as wereRaphaels, the gold 13 31). 1999, (Michie Rothschild Nathan and R Raphael Rope, Henry brokers and bankers Amsterdam 12 perce 37 for responsible being group, important most single the numb and financial the size in innovation in the enabled increased trust of which level high banks, the Second, merchant the Although instruments. ofas the system the world’sAmsterdam, former center, to payment from act their of transfer the and bankers merchant of emigration the 1969). public the by subscribed capital using but bankers merchant esta banks, overseas and investment corporate or networ links; correspondent religious banks’ leading the upon based often syndicates, Exploiting their international connections to enga to connections international their Exploiting Lo to operation their transferred that those Among

ge in the inter-country movement of securities, cur securities, of movement inter-country the in ge dn ee epe sc a a ai bne Wle Boy Walter banker Paris a as such people, were ndon 15 othschild or Mr. da Veiga (Michie 1999, 51). 1999, (Michie Veiga da Mr. or othschild aphael, and Samuel Zoete, and German Johan Schroder Johan German and Zoete, Samuel and aphael,

émigrés allowed for two developments. developments. two for allowed ction (Michie 1999, 28).1999, (Michie ction Ctrl 95 0 2 Landes 32, 30, 1975, (Cottrell 12 alance between two countries countries two between alance ivities, it was also the transfer the also was it ivities, hs mrhns imported merchants These ment of the market in the the in market the of ment nt of all overseas issues issues overseas all of nt market in the first half of half first the in market blished and managed by by managed and blished in the riskier business. In business. riskier the in oa fnnil center. financial ional London. ch as groupings and and groupings as ch l markets of some of markets l k and filial and and filial and k ies, provided the the provided ies, nd t former its ined institutions and institutions r, remained ers, rency and and rency 13 With d, d,

CEU eTD Collection e cmuiain ehoois infcnl icesd h effici the increased significantly technologies communication New rdmnnl ivnin f eerp i 13, oncin f odn n Prs by Paris and London of connection 1837, in telegraph of invention predominantly New 1.1: Box communication technologies them returnedthem home. back tropic of died settlers the of Many swamp. malarial a was p was Poyais that discover they did there Only 1823. February in September in off set one first ThePoyais. tooff set ships Poy of Bank for Poyais, in use no be would there which t for notes, England exchanged even They commissions. and land bought Immigrants house. p with Joseph St. capital elegant an and land fertile with Eden dep " Poyais of Cazique Gregor, Highness His to Aide-de-Camp and Ca C., G. K. Strangeways, Thomas "Capt. by written allegedly Terri the including Shore, Mosquito the of Sketch entitled book A country. stre Edinburgh and London in sung were Ballads prices. bargain at t advertised London,he Legationwhere in Poyaisian the established MacGregor, Gregor Sir 442). 1927, (Hasbrouck Poyais” of “State the t for London in floated was bonds percent 4 in sterling pounds 200 000 of loan London in markets stock booming of year the 1822, In 2004). Sinclair and cas the history, the in frauds biggest the of one by illustrated transfer information the for needed time the shortening by market submarine cable in 1851 and London and New York in 1866, introduction of the ticke the of introduction 1866, in York New and London and 1851 in cable submarine akt wrdie ee infcnl ifune as b te te the by also influenced significantly were worldwide markets n diin o h invto i fnnil ntttos n isrmns the instruments, and institutions financial in innovation the to addition In 16

1822 and arrived to Mosquito CoastMosquito to arrivedand 1822 al diseases and only a fraction of fraction a only and diseases al e of Poyais (see Hasbrouck 1927 Hasbrouck (see Poyais of e pt. 1st Native Poyer Regiment Regiment Poyer Native 1st pt. ublic buildings and an opera an and buildings ublic ure fiction. What they saw saw they What fiction. ure he sale of lands in Poyaisin lands of sale he chnological innovations, innovations, chnological . Their benefits can be be can benefits Their . icted Poyais as tropical as Poyais icted ency of the financial financial the of ency t t pplrz the popularize to ets aiu o Poyais, of Cacique and Edinburgh, a Edinburgh, and oy f Poyais, of tory ais notes. Four notes. ais heir Bank of of Bank heir he service of service he capital r-tape a CEU eTD Collection people, and comprised such items as mortgages, bank deposits, tra deposits, bank mortgages, as items such comprised and people, judgedpercent wasconsols efficient, of theby the standards late twentie functi efficient more a to leading arbitrage, the for allowed communi in improvements The 1.1). Box (see 1878 in telephone and 1867 in machine example, Brown and Easton (1989) conclude that between 1821 and 1860 the marke the 1860 and 1821 between that conclude (1989) Easton and Brown example, 14 interna the in competition increased an face to started Britain ma nine capital the British of the of end deepening the and towards widening emerged the Despite perfection and efficiency grownfromforeigncent 8 28 perper to between assets 1850and cent had 1913. part In debt. own government’s British the of size the in stagnation gr rapid the despite was p This total. the of cent per 64 reached expanding transferable, be rapidly would which of much debt, foreign most or domestic as the assets fi of cent per 56 estimated an financial 1850 In securities. transferable of growth thi Within 1913. rapid and 1856 between prices, (1930) constant at ₤12.9bn., ₤4.2bn.to colonial fi domestic of value The strongly. growing itself was assets the At buildings. and land as such property real of expense or the cent, per 64 to risen had proportion the 1912/13 By debt. corporate and assall 39 per of cent estimated In assets an financial represented 1850 ( of the investingwideningand deepening public: Michie economy. British of strength the reflecting world, the American of companiescountries newly joint-stock formed or (Michie issues s to attention countries, their European Western neighboring turning especially governments, return, of rate better a but Debt flexibili same the with investments at look to started investors in established was securities foreign of issue new for market For the discussion of the efficiency of capital ma capital of theefficiency of the discussion For By 1850, the British capital market was already the biggest a biggest the already was market capital British the 1850, By Br the of growth the in also reflected were developments These

rkets, see, for example, Fama (1965, 1970). 1970). Fama(1965, example, for see, rkets, 17

oning of the capital markets. capital the of oning xed assets in the UK tripled from from tripled UK the in assets xed nancial assets could be classified classified be could assets nancial London by the early 1820s when when 1820s early the Londonby owth of the banking system and and system banking the of owth ty as a holding in the National National the in holding a as ty same time the stock of total total of stock the time same tional markets. The debate debate The markets. tional enh etr we Great when century teenth ecurities issued by other other by issued ecurities de credit, and government and credit, de 1999, 71) illustrates the the illustrates 71) 1999, icular, the share taken by by taken share the icular, whereas in 1913 this had this 1913 in whereas el idpnet Latin independent newly nd the most developed in in developed most the nd ets owned by the British theby ets owned roportion was that of of that was roportion itish capital market. A market. capital itish kt dut aot its about doubts rket, th century. century. th 1999, 53, 56). 1999,53,56). by two-thirds, at two-thirds, by cations t for 3 3 for t 14 For s CEU eTD Collection banking system focused more on the provision of the short-term funds short-term the of provision the on more focused system banking industrializer early an as Britain that argument the on based (se thesis start early The 13-21). 1991, (Collins context political policies aimed at the protection of the domestic industry (for e (for industry domestic the of protection the at aimed policies ald h idsr cn e iie it tre an oes te “ear the models, i main financial examining explanations three and explanations into institutionalist divided be can industry the failed multilateral system of payments, they promoted the policies policies the promoted they payments, of system multilateral tr international from mostly came institutions financial British industrialists and financiers the between conflict the emphasized the from problem the approaching critics the Finally, 1-17). 1986, E see example, (for path-dependency strong showed established, once that argue and markets capital British the of performance the Gerschenkron’s formalized Institutionalists revolution. industrial the t of needs capital industrial long-term the for demand the meet small.was development industrial for credit bank long-term the thei from development their finance to able units family small, Sinc time. that at economy the of needs the for appropriate was 16 growth.economic t to abroad overinvestment potential the of issue the around emerged 15 reasonin neoclassical the on based is counterargument basic The (1991, Collins in 11-12):summarized Overbeek 1977; InghamRubinstein 1980; 1984). See also Heaton (1972). (1972). Heaton also See s theofliterature, discussion and thereview For 15 h tertcl xlntos uprig h agmn ta te ba the that argument the supporting explanations theoretical The

ee Collins (1991) or McCloskey (1970). McCloskey (1970). or (1991) Collins ee 18

developed a banking system that system banking a developed f re rd ad poe the opposed and trade free of r own sources, the demand for demand the sources, own r e firms back then were mostly were then back firms e British financial institutions, institutions, financial British he firms in the later stages of of stages later the in firms he d ad hi rl wti the within role their and ade xample, see Hilferding 1910; 1910; Hilferding see xample, 16 As a result, the developed the result, a As sociological point of view view of point sociological . Since the profits of the the of profits the Since . Grceko 16) is 1966) Gerschenkron e he detriment of domestic of detriment he trss ihn socio- a within nterests indirect comments on on comments indirect bu ad Lazonick and lbaum and was not able to to able not was and y tr thesis,” start ly g, which is is which g, nks CEU eTD Collection bias in favor of overseas assets, nor a bias in favor of large b large of favor in bias a nor assets, overseas of favor in bias to prepared banks those for opportunity profitable potentially h atmtd is n h oeain f h cptl markets capital the of operation the conclude he in markets, bias perfect of attempted assumption The the Under (1976). Edelstein volume large no was there – so doing demand. not for industr reasons long-term market provide sound not did were banks if then, argument, of line this On f met being was industrial or insignificant either British was companies their of demand the that argue, markets of like efficacy is It side. supply the on this failure any than in rather them fact, for In area. this pro services financial certain of in absence the that suggested “failure” bank of possibility the acc effect, In and optimality rationality, of supply. assumptions usual with – markets to refused institutions financial making competinglegislationsgas( authorities as industry and owners local of the hosti the of result the predominantly was industry electrical new cite oft The 138). (ibid, industry radio or oil nascent as such risk, of promoters secur the welcomed Exchange Stock London the companycriticism, the despite and trusts investment banks, merchant the including Br of spread the but alone banks commercial the with not compared credit, industrial long-term the of provision the in better were continent that evidence little is there that out points 137) (1999, Michie retur percent 4.6 to compared percent 5.7 was securities overseas estimat (1994) Edelestien securities. domestic than returns higher be securities overseas preferred investors British Rather, 1870-1913. capita long-term demanding constantly been have s is could it then industry well, quite British work – markets fac financial In British deficiency? including obvious any correcting by profits their positive a surel – created provoke so opportunities profitable the not to side supply would demand unsatisfied centuries!) or decades a over that incredible seems it perspective neo-classical resources of allocation the and price and reconciled are supply and competitive other to likened be can markets capital and money The 19

number of months, or years (let alone alone (let years or months, of number bably reflected the lack of demand of lack the reflected bably rom sources other than the banks. banks. the than other sources rom t, if you believe that markets – – markets that believe you if t, y suppliers would act to increase to act would suppliers y meet the demand) which profit- which demand) the meet ly, so those who believe in the in believe who those so ly, orrowers during the period of of period the during orrowers of profit-maximising – denies denies – profit-maximising of lity of the central government central the of lity atclr ae i i often is it case, particular ed that the average return on return average the that ed eptance of the rationale of of rationale the of eptance ss o fns rm outside from funds for ists seily hn hy are they when especially determined. Seen from a from Seen determined. markets in which demand which in markets o dmsi securities. domestic on n itish financial institutions financial itish d lack of support for the for support of lack d imply not credible that that credible not imply was formally tested by by tested formally was ities with a high degree degree high a with ities as tee provided these cause s that there was no no was there that s ibid, 138). ibid, l uoen banks European al response on the the on response ial finance there there finance ial Furthermore, . f unsatisfied of (raig a (creating l CEU eTD Collection otoi oe,Prn adRut(04 lutaeta Fec fore French that illustrate (2004) Rault and Parent model, portfolio capital the which to according (1990), Paradox Lucas the or bias”, RegionalDistribution ofCapital 1.3 America and Oceania. Clemens and Williamson (2004) document the existence of t the (2004) document Williamson and Clemens Oceania. America and and financial considerations. Similarly, Esteves (2008) supports the supports (2008) Esteves Similarly, considerations. financial and w War World First the of eve the until century nineteenth the of end fact economic of role wider a suggest and techniques econometric and e improved on rely They picture. different a paint studies recent poli was investment foreign that asserts i view influence traditional of sphere This their underwrite to attempted Germany Lévy-Leboyer 1961, Fishlow 1985,and 1977). (F governments European to loans mostly assets, European unproductive politi were German and French assets, productive towards directed capita British whereas that belief widespread the to led hand, investme German and French the and hand one the on investment British the were exports capital German and French British, to i difference contrast The East. In Middle and Scandinavia Europe, Eastern and (Schularickinternational Steger capital 2008). movements di sharply the for account they account, into taken are countries poor and insti in differences the Once quality. institutional the for control Willia and Clemens However, populations.” young and flows, migration natural chasing profitable, most was it where went enterprise espec exports capital “British that conclude They countries. British capital went to the regions of recent settlement, most settlement, recent of regions the to went capital British 20

l exports were market-driven and market-driven were exports l resources, educated populations, educated resources, n certain regions. However, the the However, regions. certain n ially that invested in private private in invested that ially n the regional distribution of distribution regional the n tutional quality between rich rich between quality tutional stimates of the capital flows capital the of stimates view that German capital capital German that view ign investment from the the from investment ign ly North America, Latin America, North ly as driven by economic economic by driven as cized and directed to to directed and cized iie a Fac and France as ticized favored rich to poor poor to rich favored mson (2004) do not not do (2004) mson directed mostly to to mostly directed eis 1930, Cameron 1930, eis vergent patterns of of patterns vergent ors. Relying on a a on Relying ors. nt on the other the on nt he “wealth “wealth he CEU eTD Collection popularity of the U.S. railroads? popularity railroads? U.S. of the promptly with each of the major financial crises of the pe the of crises financial major the of each with promptly States1.3.1 United investment. count recipient of growth of prospects long-term to responded flows mut 6,% wn it te railways. the into went – 61,6% – amount A.1). Appendix (see 1914 and 1865 between called capital total the of 20.5% 92 50 qoe i Wlo ad okf 19, 5) wt cntuto bos ending booms construction with 355), 1998, Rockoff and Walton in quoted 500, 1972, (Fishlow 1886-1892 and 1879-1883, 1868-1873, construction: track main of pattern century ma three identifies Fishlow America. of West the and East transconti three of development the of start the and War Civil the bega routes railroad new of construction fastest The 71). 70, 1980, (Niemi competing the to compared cost higher its offset to enough were th by and flexibility and speed its were transportation canal t over railroads the of advantages major The States. United the of W 1914. and 1865 between exports capital British total of 13% almost 17 the across migrants of movement faster and safer enabled They sepa that spaces vast the connected railroads The 321-28). Q and 312 Series 1973, Census. the of Bureau (U.S. 1915 in miles 231 291 to and 1855, in 374 mile 23 from grew operation in mileage railroad The 355). 1998, Rockoff and See Adler (1970) or Jenks (1951). Jenksor (1951). (1970) Adler See h bget motr f h Biih aia ws h Uie S United the was capital British the of importer biggest The The construction of railroads began at the end of the 1820s, concentrati 1820s, the of end the at began railroads of construction The

17 21 hs en ta Aeia riwy received railways American that means This

riod: 1873, 1882, and 1893 (Walton (Walton 1893 and 1882, 1873, riod: e middle 1850s these advantages these 1850s middle e jor waves in the late nineteenth- late the in waves jor nental routes, which tied the tied which routes, nental country, compared to the the to compared country, he existing steamboat and steamboat existing he ways of transportation transportation of ways ries as much as British as much as ries rated East from West. West. from East rated tates, which received received which tates, hat was behind the the behind was hat n after the end of of end the after n s in 1830, to 18 to 1830, in s ng in the east the in ng The highest highest The Q 284- Q CEU eTD Collection einn, hn hr apae frt od fr h cntuto o the of construction the for bonds first appeared there when beginning, years. postponed only two for Europe. to exported C East the in harbors to wheat) later and tobacco cotton, (mostly a of transportation the eased they time, same the At 352). 1998, Rockoff Ca around or Panama of Isthmus the via routes sea and trails wagon 80 o (remn n Shat 19, 67) Te eudn oeain o te U.S the of operations refunding The 76-77). 1993, Schwartz and (Friedman on 1870s point percentage 2 a maintained and bonds, government the on yield gold the p moved bonds railroad the on yield currency the 1869 by in early bonds: railroad replacement their and bonds government U.S. the of redemption develop this behind reasons the of One 91-92). 1999, (Michie 1913 in Exchange the in securities quoted all of cent per 18 reaching 377), 1951, (Jenks London wer York New in listed securities new all of half one 1887, In mar alternative important an became Exchange Stock London The common. rail in speculation and investment portfolio the of form took investment c routes transcontinental the of beginning the with War Civil the espec off took railroads American the in investment the However, 1830s. 1820s late the in 376) 1951, (Jenks Baltimore&Ohio and Philadelphia&Reading, growt economic the railways, no been there had that demonstrating (Fishl 1859 in railroad the of savings social the of estimates through counter (1964) Fogel and IV) Chapter (1965, Fishlow of works the growth, l the were and demand the of ahead build were railroads that argue Rostow and (1949) Schumpeter Whereas growth. economic the to railways However, despite these advantages, there is a debate on the contrib the on debate a is there advantages, these despite However, h Lno mre priiae i te mrcn ala financi railway American the in participated market London The 22

lse ams a oc in once at almost listed e eading sector of economic of sector eading ntuto. ot f the of Most onstruction. ow) and in 1890 (Fogel), 1890 in and ow) at fo wee t was it where from oast, way securities became became securities way e on Wlo and (Walton Horn pe gricultural production gricultural h would have been been have would h ially after the end of of end the after ially ution of American American of ution g ic te very the since ng Camden&Amboy, ermanently above above ermanently (1960, Chapter 4) 4) Chapter (1960, ket to New York. New to ket oe lucrative more their arguments arguments their gap from late late from gap London Stock Stock London ment is the the is ment and early early and . CEU eTD Collection ulig f h tasotnna rira, h Itrooil Railway Intercolonial the railroad, transcontinental the of building people across the country and to and from the harbors and this way this and harbors the from and to and country the across people Montréal paid up only 10% of the initially subscribed ₤100 000 and by and ₤100 000 subscribed initially the of 10% only up paid Montréal Ra Atlantic and Lawrence St. the for Britain in raised was ₤53 000 cameincrease the production agricultural in and the after immigrati 1900with joi to agreed Columbia British which upon its condition the and was completion b) undated, Encyclopedia, (Canadian 1867 Act, Constitution the into i Canada of Confederation with came building railway west of phase and second eastward both expanded then building railroad The 1836. in opened fe production of the mostly Canadian rested that agricultural exports uponthe was a) undated, Encyclopedia, Canadian (The year per months 5 to wate and roads poor the over advantage comparative Their markets. new alas ee ul fr iia raos Te eald h t the enabled They reasons. similar for built were railways bet called capital the all of 40.3% absorbed which railways, the ( exports c British of amount highest the States, United the Similarlyto capital British overall the of 10.1% attracting 1914, and 1865 1.3.2 Canada the A.2). government Appendix (see bonds B the of recipients major other all to compared hint amount smallest the give yield currency the in differences the and government The British capital was involved in the financing since the beginni the since financing the in involved was capital British The La Saint and Champlain the was line railway Canadian first The aaa akd s h scn aog h mjr eiins f British of recipients major the among second the as ranked Canada 23

apital in Canada was invested in in invested was Canada in apital ransportation of products and and products of ransportation ritish capital, was invested in in invested was capital, ritish en 85 n 11. The 1914. and 1865 ween tied together and opened opened and together tied a a odto written condition a was ilroad after residents of of residents after ilroad obvious, given the fact fact the given obvious, why only 5.8%, the the 5.8%, only why 1860 the Grand trunk Grand the 1860 n 1867. In fact, the the fact, In 1867. n rways frozen for up for frozen rways . h ls phase last The n. g Fr example, For ng. wrence Railroad Railroad wrence 423 million). ₤412.3 rtile prairies. rtile prairies. on. capital between capital successful ward. The The ward. CEU eTD Collection percent of the aggregate funds supplied by British investors during investors British by supplied funds aggregate the of percent public utilities. Throughout the period under study, the public util public the study, under period the Throughout utilities. public rts cptl akt ee lae mxd nepie, thr enterprises, mixed floated were market capital British ne all of percent twenty Approximately securities. railway l all on governments Canadian the capital, private the by financed rail borrowing in London (ibid, 244).London (ibid, rail borrowing in tota issues government these with market, capital British the in Domi by offered loans direct by possible made was assistance shar railway of above) applied rate the given million, (₤10.1 million su and million) (₤9.44 million $46 of subsidies cash provided governments provin that, to addition In (ibid). governments provincial with conjunction land in acres 47 291 000 over turned and railways to subsidies and cash of million) ($754.5million ₤154.9 providedgovernment federal The 1970,243). (Simon 1914 n imgain ic te einn o te 90, hr ws n incre an was there 1900s, the of beginning the since immigration and Reflect capital. British the of 6.2% absorbed sector financial breweries into rest the and steel and coal iron, of production the into agri manufacturing,as such activities, industrial and commercial precise more production, capital industrial in British invested was overall Canada the to exported of 10.1% 1865-1914, period the During 52-61). 1999, Stone by (Canadian b). Encyclopedia, backed loans British with financed largely ope was and and owned government was Railway Intercolonial The a). Encyclopedia, G and Bros Baring of banks British the to debt in ₤800 000 was Railway h Biih netet a drce as t ohr nutis (for industries other to also directed was investment British The Unlike the U.S. railroads, which, despite the initial governmental initial the despite which, railroads, U.S. the Unlike 24

w Canadian securities issued in the in issued securities Canadian w ough which Canada obtained 42 42 obtained Canada which ough ing an increase in urbanization urbanization in increase an ing nion and Provincial authorities Provincial and nion ling almost 15 percent of the the of percent 15 almost ling culture, and trade; 2.4% went 2.4% trade; and culture, evels actively promoted the promoted actively evels ities attracted 5.65% of the the of 5.65% attracted ities es (ibid, 244). Part of this of Part 244). (ibid, es the half century prior to to prior century half the ae b te federal the by rated meil guarantees imperial n dsilre. The distilleries. and ased demand for the the for demand ased support were mostly mostly were support lyn Mills (Canadian Mills lyn ly, 7.4% went into into went 7.4% ly, cial and municipal and cial grants to them in in them to grants oe eal, see details, more srbd o $49 to bscribed

CEU eTD Collection between 1900 and 1913 (Cairncross 1992, 42). betweenand 1992,42). 1913(Cairncross 1900 become a large exporter after 1883 (Ferns 1992, 248). This economic economic This 248). 1992, (Ferns 1883 after exporter large a become 1.3.3 Argentina Buen to fromEngland freight the as great nearlyas fro miles twelve some stop to had vessels steam the Por Cobalt, the in ores mineral of deposits rich of reflected development investment This investment. British the of 3.5% received equal attracting sectors both with omnibuses, and tramways the and int went share highest The Canada. to exports capital British that occurred outside the United Kingdom in 1889 (Mitchener and Weidenmier 2007, 3). 2007,3). (Mitchener andUnited Kingdom occurredthat Weidenmier 1889 the in outside attract Besidesit that,A.3). Appendix (seeworldwidecapital the becoming exports, capital British of percent 16.7 attracted mil (₤349.2 called capital British total the of 8.6% attracted It from which it could be exported overseas. exported be could it which from s a in production agricultural the bringing allowed railways Second, enhancing conflict, of point the to country the across quickly move could Arge vast the over control taking allowed railways in Investment de significant a was There utilities. public of development and railwa of construction the at aimed policies, economic by supported of importer an be to ceased had Argentina and 500% by grown had doubled; had hides, exports, Argentine of staple traditional the 1890 and 1870 18 Because of the shallow waters of the River Plate, Plate, River the of waters shallow the of Because Argentina was the third largest importer of the British capi British the of importer largest third the was Argentina The capital was pulled in due to the rapid economic expansion in t in expansion economic rapid the to due in pulled was capital The

os Aires (Ferns 1992, 245). 245). 1992, Aires(Ferns os 18 the harbor of Buenos Aires was not a good natural p natural good a not was Aires Buenos of harbor the m the shore, with the costs of unloading into light into unloading of costs the with shore, the m As a result of technical improvements, such as such improvements, technical of result a As 25

o the electric lightning and power power and lightning electric the o ed 40 to 50 percent of all lending lending percent all 50 toof 40 ed number one importer of British of importer one number lion). During 1885-1889, it it 1885-1889, During lion). mand for such investment. investment. such for mand tal between 1865 and 1914. and 1865 between tal cereals and flour, and had had and flour, and cereals cupine and other districts districts other and cupine hort time to the harbors, the to time hort ntine territories. Troops Troops territories. ntine ly 2.4%. Finally, mines mines Finally, 2.4%. ly s n hro building harbor and ys h dsoeis and discoveries the he 1880s. Between 1880s. he development was was development the state security. security. state the wool exports wool ers being being ers ort and and ort CEU eTD Collection plagues of cholera because of contaminated water. As a result result a As water. contaminated of because cholera of plagues (Ferns 1992, 257). (Ferns 1992,257). for in surge great the before been had it what double nearly was Arg of debt foreign the servicing of cost the that meant which 94% 1889, to in 1888 in 48% 1887to in 35% be from measured, rose coulddomestic inflation pre gold The debts. gold its servicing problems have to started ris the With money. fiat a on operated standard, gold the adopt Argentina, However, gold. or sterling in markets capital European A.2). Appendix (seethroughout 1865-1914 the period th to 22.4 and utilities public Brit into 8.9 railways, into of went Argentina percent 57.5 utilities, public and services transportation wat the over took which enterprise private a promoted which Baring, 1890. The Baring crisis was a combination of the maturity and the andmaturity the of combination a was crisis Baring The 1890. Barin the as known crisis the to leading country, the of management xeto o the of exception st mismatch currency The debt. overseas on charges interest reve sufficient generate to failed therefore and long-run the in or railways pub as projects, such The investment term liabilities. t between imbalances the from stemmed mismatch maturityThe i necessary was system sewage and water the in investment the rapidly growing were exports Argentine when decline to started pri refrigerating, and construction steel of vessels driven steam 19 imth rss se fr xml, od 15) For (1956). Ford theBarin leadingto theevents relations, economic example, for see, crisis, mismatch uh a be witn n h Brn Cii. o th For Crisis. Baring the on written been has Much h cii ws motd o ra Bian hog te merchant the through Britain Great to imported was crisis The in problems serious were there expansion, economic the Despite cedulas ln mrgg bns, h Agnie od wr ise on issued were bonds Argentine the bonds), mortgage (land

g crisis and its resolution, see Ferns (1960, 1992) (1960, Ferns see itsresolution, and gcrisis 26 h dtie dsuso o te rts ad Argenti and British the of discussion detailed the dsuso o te aig rss s h mtrt a maturity the as crisis Baring the of discussion e

emmed from the fact that with the with that fact the from emmed entina in the national currency currency national the in entina mium, by which the degree of degree the which by mium, ce in ocean grain-freight rates rates grain-freight ocean in ce nues to keep in line with the the with line in keep to nues short- and assets long-term he lic utilities, generate revenues generate revenues utilities, lic (Ferns 1960, 406). Finally, 406). 1960, (Ferns eign investment had begun begun had investment eign currency mismatch crisis. mismatch currency odr o rvn further prevent to order n n ifain te country the inflation, ing g, or Argentine, crisis of crisis Argentine, or g, ish capital exported to to exported capital ish er and sewage system of of system sewage and er of the demand for the the for demand the of e government financing financing government e fe svrl alrs to failures several after the macroeconomic the ak h Hue of House the bank . nd ne ne 19

CEU eTD Collection by the Bank of England, which, in cooperation with the Bank of Franc of Bank the with cooperation in which, England, of Bank the by points between 1890 and 1895. In contrast, yield spreads for non-Latin emer non-Latin for spreads yield contrast, In 1895. and 1890 between points 1891 (Mitchener and Weidenmier 2007,7). pe 11 by fell GDP real percent Argentina’s and 1890s 60 the in nearlydebt defaulted constituting up ended which 1890, in debt of million defaulte Argentina hand, other the On fund. rescue a formed institutions, B of House The market. London the in placed be not could and Aires Buenos increased by more than 840 basis points between 1890 and 1891, and more than 1,600 than more and 1891, and 1890 between points basis 840 than more Lat by increased for premium risk country the that conclude and Crisis Baring glo the examined 2) (2007, Weidenmier and Mitchener America. Latin the 1.3.4 Australia 1896. in againwhen crisis only recovered from Argentina the cap The higher. points basis 200 than more were countries American Cr Baring the of result direct a As ge period. this were during unchanged U.S.) the and countries European income (high countries “core” Dyster 1999, 11). The highest share of the capital raised through the through raised capital the of share highest The 11). 1999, Dyster water electricity, gas, amenities, social transport, urban as such projects, infrastructure expensive of variety a finance governme century, twentieth the of half first the and nineteenth the In p and colonial the represented 65.8%, Australia, to exports capital hig The exports. capital British overall the of 8.3% imported it 1914 The crisis had global effects on the direction of the capital the of direction the on effects global had crisis The h fut lret motr f h Biih aia ws Austr was capital British the of importer largest fourth The 27

supply and sewerage (Meredith and and (Meredith sewerage and supply railways, roads, port facilities, facilities, port roads, railways, rovincial government loans. loans. government rovincial flows, which diverted from from diverted which flows, ss od ils n Latin- in yields bond isis ital flows started to grow grow to started flows ital la Bten 85 and 1865 Between alia. rcent between 1890 and 1890 between rcent hest share of the British the of share hest government loans went loans government in American countries countries American in nts used these loans to to loans these used nts e and British financial financial British and e bal effects of the of effects bal ging markets and markets ging d on nearly ₤48 ₤48 nearly on d aring was saved saved was aring f h world’s the of eal fa or flat nerally basis basis CEU eTD Collection orwn hle t fnne h vrul opein f h tuk line trunk the of completion virtual the finance to helped borrowing private companies due to the colonial status; or the ability of of ability the or status; colonial the to due companies private percent in land and mine speculation, it could not be diverted to less to diverted be not could it speculation, mine and land in percent railways.the to of total public debt of colonial governments (Butlin (Butlin governments colonial of debt public total of 20 Australia, so that, by 1901, over 19 000 km of track were being operated (ibid, 262). Australia, were over that, byoperated so (ibid, of 19000km track being 1901, larger stocks of capital though taxation, land sales and ability t ability and sales land taxation, though capital of stocks larger abili the to related are them of Most railways. Australian grant crown lands to railways. Since private capital in Austra in capital private Since railways. to lands crown grant Gove Imperial the of interference the on based which, policy, land influence the stresses402-403) (1908, Clark 59). 1999, Dyster and Meredith 262; 1982, (Clark 1908, 402). (Clark 1908,402). (Australian output gold world’s the of third one than more contributed tele the and 1850s the railway in Already trade. for Australian supported incentives and immigration provided They Australia. on impact discoveries gold further by triggered were and 1851 in star gold of which discovery rushes, gold Australian The 67). 1989, Press and (Harvey 1860s the of deposits copper rich the exploiting in and 1850s, the of rushes Wales South New the in 1840s, the in Burra Burra and Kapunda at mining Austral firms in Australia. to British exports British13% capital of the substantial external economic benefits and to accept moderate accept to and benefits economic external substantial For a detailed analysis of the Australian railways Australian analysisthe of detailed a For hr ae eea raos eid h pbi rte ta priva than rather public the behind reasons several are There h mnn, s h lret uctgr o rw aeil inve material raw of subcategory largest the as mining, The 20 In the early years of the twentieth century railway debt m debt railway century twentieth the of years early the In

, see Clark (1908) or Butlinor (1908) Clark see , 28

t al et ty of the government to mobilize mobilize to government the of ty . 1982, 262). For example, the the example, For 262). 1982, . rates of return (see Butlin (see return of rates lia was earning from 20 to 50 to 20 from earning was lia o borrow at cheaper rates than rates cheaper at borrow o et al. et h gvrmn t capture to government the rnment, did not allow to to allow not did rnment, stment, attracted almost almost attracted stment, (1982, 259-293). 259-293). (1982, ia were active in copper copper ia were in active remunerative railways railways remunerative Yorke peninsula in the in peninsula Yorke te financing of the the of financing te Government 2007). 2007). Government colony of Victoria Victoria of colony , had an important important an had , o southeastern of s ade up 60 percent 60 up ade and Victoria gold gold Victoria and graph building, building, graph e atr the after ted of the of et al.et

CEU eTD Collection purposes coincides with the Melbourne land boom of the 1880s, which ended wi ended which 1880s, the of boom land Melbourne the with coincides purposes thous 873 4 from rose Exchange Stock London the on listed companies the by 1871 in (ibid). 1.7million to of Australiapopulation from 1851 trebled 430000in servicing the growing overseas liabilities.overseas growing the servicing payments of balance 1891 the to due 1891 in capita per GDP in f acquired land the of Most (ibid). world the in purposes speculative overa the of 15% almost for accounts which hectares, thousand 689 3 acquired c 8 were there 1913, sp In III). for Table see acquired 458, 1985, area (Christopher worldwide land overall the of 17% than more represented Australia in land of hectares thousand 518 2 acquired which Exchange Stock London investment were there 1885, In purposes. developmental the vague or speculative by dominated was investment This I.). Table see 456, 1985, (Chr worldwide) land of (15.5% 1913 in companies 108 by owned hectares thousand worldwide) acquired land overall the of (19% 1885 in companies 36 by owned the of number The investment. land speculative to going 6.5% with 1914, and fr growth inthetrend slowdown thealleged thanon 1890 after decline comparative economy’s Australian G by also capita per GDP Australian the in collapse yea The 1907. by only restored was 1890 in attained su was product real aggregate 1890 the 1897; in ₤48 import of flow huge a brought London to shipped was that bullion gold The 21 ended 1900. in s smaller a at although 1890s, the of depression Australian the during Butlin (1962, 460; 1970, 282) calculated that real that calculated 282) 1970, 460; (1962, Butlin Financial industry received 11.6% of total British exports to Aust to exports British total of 11.6% received industry Financial

21 om the 1890s. 1890s. the om rpassed only in 1904 and the level of per capita re capita per of level the and 1904 in only rpassed However, the investment in land continued also continued land in investment the However, GDP per capita in Australia dropped from ₤66 in 18 in ₤66 from dropped Australia in capita per GDP r of 1891 (and also of 1925) is identified as the y the as identified is 1925) of also (and 1891 of r reasly and Oxley (1998), who argue that the causes causes the that argue who (1998), Oxley and reasly should centre on the collapses after 1891 and 1925 and 1891 after collapses the on centre should 29

crisis and the difficulties in in difficulties the and crisis 11 companies listed on the the on listed companies 11 cale and more-or-less more-or-less and cale ralia between 1965 between ralia eculative purposes purposes eculative or the speculative speculative the or ompanies which which ompanies ll land area for for area land ll land acquired acquired land n ad for land in and hectares hectares and th a collapse a th s and the the and s o 0 997 10 to al income income al istopher istopher ear of the the of ear , which , , rather rather , of the the of 89 to 89 CEU eTD Collection predominantly investors who sought safety. predominantlywho sought safety. investors rvt ivsmn (a Cmiso 20, -) Gaate tu soe t b to showed thus Guarantees 3-4). 2007, Commission (Law investment private motn fco i te lw f h Biih aia it te Indi the into capital British the of flow the in factor important 1.3.5 India guaranteed 4% return on the capital for a limited five-year-p limited a for capital the on return 4% guaranteed guar new a introduced and move this of burden financial the realized only However, system. guarantee original the by imposed burden cost propose all of construction the directly undertook Crown) British the St of Secretary(a state the 1869, From 181). 1955, (Macpherson 1869 in 3.05 i 0.22 only being railways Indian all of p outlay capital the on earnings with 1866-7, before percent 5 guaranteed the reach company any 2). 2007, sinc returns realized Commission the by justified be to out turned guarantees Law 180-181, 1955, (Macpherson contract operating year f companies railway the afforded return, percent 5 a investors the 1858 after and Company, India East the Therefore, investment. inves British the mid-1840s, in construction the for proposal first railw Indian in investment all Virtually ports. the to commodities moveme the and values “English” of spread troops, military the of consider were They interests. military and social commercial, in that to similar was construction railway the behind motivation c British of 40.5% received railways Indian financing. government share highest The 1914. and 1865 between exports capital British the The fifth largest importer of the British capital was India was capital British the of importer largest fifth The 30

eriod, this way triggering the new new the triggering way this eriod, ree use of land and offered a 99- a offered and land of use ree ed a tool for a quick movement movement quick a for tool a ed e in no case did the profits of profits the did case no in e . Overall, it received 7.8% of of 7.8% received it Overall, . other countries, relying on relying countries, other tors were not keen on sole on keen not were tors apital exports to India. The India.The to exports apital n 1854, 1.98 in 1864 and 1864 in 1.98 1854, n y a Biih Sne the Since British. was ay other and cotton the of nt British Crown guaranteed guaranteed Crown British d line in reaction to the the to reaction in line d an railways, attracting attracting railways, an a year later the state the later year a , 45.8%, went to the the to went 45.8%, , antee system, with a a with system, antee ercentage of net net of ercentage ate representing ate te most the e The CEU eTD Collection by the diamond discovery near the Vaal River in 1867, which triggered a triggered which 1867, in River Vaal the near discovery diamond the by oiia dcsos Laig netr i te rnva ad hdsa – Rhodesia and Transvaal the in investors Leading decisions. political Cha of discussion above the (see projects development political 1.3.6 South Africa1.3.6 South British the financing study. overall under during the period sec financial and 2% approximately sector industrial 3%, than more Publ 1914. and 1865 between India to capital British of imports overall attr production, tea the and mines of lead the with materials, Raw ranking second after the United States (see Appendix A.3). The capit The A.3). Appendix (see States United the after Briti second ranking the of 14.4% received it 1900-04 of period the during and 8.9% received it 1895-99, of period the During pounds. million 232.2 to amounted which 6.4%, namely ca British of share highest the received Transvaal Africa. South

Transvaal was producing over a quarter of the world’s annual output of output annual world’s the of quarter a over producing was Transvaal B 1885. in Witwatersrand the on ores bearing gold rich of discovery the 1865-1914, right behind the 50.9% lent to the government A.2).1865-1914, right the (see 50.9% the to lent behind Appendix Afri South to called capital British the of 33.5% attracted Mining ooil fie. n h ohr ad itrss f h ivsos we investors the of interests hand, other the On Office). Colonial A South the in investment the stimulate to tries were there hand, one relationship this that is Interesting politics. the and Africa f h Tasal hme o Mines of Chamber Transvaal the of After the Baring crisis, the investment was redirected into t into redirected was investment the crisis, Baring the After Considerably smaller amounts of the British capital went into ot into went capital British the of amounts smaller Considerably As already noted above, there was a relationship between the the between relationship a was there above, noted already As

o te er 1910 Year the for 31

, 1911, cited in Van-Helten 1982). 1982). Van-Helten in cited 1911, , worked in both directions. On the On directions. both in worked pital between 1895 and 1904, and 1895 between pital he new geographic region, region, geographic new he a hogot h period the throughout ca brans ok n the in work mberlain’s re able to influence the the influence to able re tor only around 1.5% of of 1.5% around only tor ce ams 6 o the of 6% almost acted investment in the South South the in investment al was attracted mostly mostly attracted was al rc a a at f the of part a as frica gold ( gold y the late 1890s, the 1890s, late the y her industrial fields. industrial her c tlte attracted utilities ic diamond rush, and rush, diamond seily Cecil especially Annual Report Annual h capital, sh CEU eTD Collection problems. Brazil went on gold standard at the end of 1888; however, however, 1888; of end the at standard gold on went Brazil problems. nuig h fnnil ntblt, h Agnie rss f 80 ha 1890 of crisis Argentine the dom instability, the financial to the addition inducing in that argue (2005) Wandschneider and Triner crisis. i standard gold the of abandonment in resulted policies Expansionary acce the to led which policies, monetary loose the with accompanied 1.3.7 Brazil 68). it called George Lloyd as dividends,” 45% for “war the War, Boer responsible directly were interests diamond and gold British 68). 1973, Britain’s on influence personal powerful a exerted – himself Rhodes Abreu 1988,8). Briti with trade financing in role major Brazil, a playing Brazil in operating to capital of supplier only the virtually vas was Brazil in influence British 1890), and (1850 Empire the During 1914. the throughout exports capital British overall the of million) (₤172,742 4.2% republic in 1889 and the second military coup in 1891, were combined wit combined were 1891, in coup military second the and 1889 in republic mili the oligarchs, landed the by disliked 1888 in slavery of abolition Poli period. Republican early during and before economy Brazilian the of result the was This government. Brazilian the to loans the to unwelc was market capital London the 1895 and 1890 between However, government. rzl a te eet lret motr f h Biih capit British the of importer largest seventh the was Brazil The highest share of the British capital exports to Brazil, Brazil, to exports capital British the of share highest The 32

, agriculture and industry (de Paiva (de industry and agriculture , sh-owned commercial banks banks commercial sh-owned 45.9%, was borrowed by the the by borrowed was 45.9%, (as quoted in Cohen 1973, Cohen in quoted (as l olwd, attracting worldwide, al n 1890 and the financial financial the and 1890 n colonial policy (Cohen (Cohen policy colonial tary coup instituting the instituting coup tary problems faced by the by faced problems tical problems, such as as such problems, tical d a crucial exogenous exogenous crucial a d for the outbreak of the the of outbreak the for leration of inflation. inflation. of leration h serious economic economic serious h period of 1865- of period this move was was move this t. Britain was Britain t. si factors estic oming oming CEU eTD Collection oiia fre ne te meil oenet ni 18 ad lo unde also and 1889 until government imperial the under force political rvso o gaate dvdns y h ipra gvrmn i 15 (Summe 1852 in government imperial the by dividends guaranteed of provision rdmnnl o cfe bt lo ubr sgr n cto, hc wr t were which cotton, and sugar rubber, also but coffee of predominantly kilometers of track between 1852 and 1900 (ibid, 542).kilometers of track 1852and 1900(ibid, between buil to Brazil enabled thus guarantees dividend government-supplied The guar and companies betweenthe split 8%, typically return, of p with government, provincial and central the between split usually 7% or 6% of typically return of rate minimum guaranteed The 545). eulc Ter ead tme fo te ed o te en o c of means the for need the from stemmed demand Their republic. slave-owners, the 1888 in slavery of abolition until and land- the from articles of Brazil.of articles 23 2 Wandschneider and in Triner Cited 1988. (Fritsch, spillingthe over and Argentine“contagion”character its Bra to crisis of financial Brazilian of extent perhaps and timing the in influence 22 1.3.8 Russia Britishfinancialand financing overall 1914. 2.1% sector of between 1865 the 6.5%, than more received sector Industrial Australia. or Argentina as such settlement, recent of regions other to similar situation urba of rate fast the by predominantly induced was demand The 1914. and 1865 attrac it study, under period the During 1914. and 1865 between capital See Summerhill (1998) for a detailed discussion of discussion a for detailed (1998) Summerhill See incr production coffee Brazilian 1890s, the During Railways attracted 31.6% between 1865 and 1914. The demand for the railwa the for demand The 1914. and 1865 between 31.6% attracted Railways Public utilities attracted 10.2% of the overall British capita British overall the of 10.2% attracted utilities Public usa te ags Erpa dbo, a te ihh ags im largest eighth the was debtor, European largest the Russia, 22 However, the capital began to flow into the railways only wit only railways the into flow to began capital the However,

006, 24). 24). 006, the railway subsidies in Brazil, 1854-1913. 1854-1913. Brazil, in subsidies railway the eased from about one-half to 70 percent of the glob the of percent 70 to one-half about from eased 33

23

antors (de Paiva Abreu 1988, 8). 8). 1988, Abreu Paiva (de antors deterioration, suggesting the the suggesting deterioration, h Uie Sae, Canada, States, United the l exports to Brazil between Brazil to exports l raw material 2.9% and the the and 2.9% material raw rofits above a certain rate certain a above rofits for up to 60 years were were years 60 to up for zil. zil. otr f h British the of porter who were the major major the were who ted 3.4% of British British of 3.4% ted r the following following the r he main export export main he heap transport, transport, heap sm 20 000 some d hl 1998, rhill nization, a nization, h the first the h ys came came ys al total total al CEU eTD Collection balance Alliance Germany,Italy.Austria-Hungary Triple and of beginning of the twentieth century because the new the because century twentieth the of beginning

3) Te iaca ad iiay oprto bten rne n Rus and France between cooperation military and financial The 330). and (Parent 1894 to 1888 from Bourse Paris the on bonds, government Russian and 1914 (see Appendix A.2). A.2). andAppendix 1914 (see capit British total the of 3% for utilities public and 3.9% for sector financial 12, for materials raw 24.8%, the for accounted Russian Alliance between 1894 and 1917 was preceded by the floatation o floatation the by preceded was 1917 and 1894 between Alliance Russian overall British capital exports to Russia. Russia. to capitaloverall exports British 50.3% the to amounted government Russian the to loans the Overall, (ibid). st the to admitted were issues government earlier and 1909 in issued Anothe Tibet. and Afghanistan, Persia, in influence of spheres Russian defi finally which 233), 1974, (Feis 1907 of Agreement Anglo-Russian the being decades,three in market the in loan government Russian direct fir the London, in 1906 of loan government Russian the of issue the in resulted initia the took Government Russian the Thus, Russian 229). 1974, the (Feis means cabinet, financial and Czar the of will the curb to body, expected legislative a of establishment the permit and constitution the forced agitation revolutionary the and Persia and China in aggression the availability of the London market during the Ru the marketduring London the of theavailability Asia. Central Russi the and Empire British the between rivalry the of result Russia in investment British no virtually was there 1890s, and 1880s the cap this of majority the However, world. the to exports capital 24 n diin o hs iar, es 17, 2) noti 229) (1974, Feis rivalry, this to addition In However, the majority of Russian foreign investment came from F from came investment foreign Russian of majority the However, The improved political relations led also to the renewed private renewed the to also led relations political improved The 24 oee, s h RsoJpns Wr eue Rsi’ capacit Russia’s reduced War Russo-Japanese the as However,

sso-Japanese War only to Japan. Japan. only to War sso-Japanese persecution of the Jews re-aroused Rothschild hosti Rothschild re-aroused Jews the of persecution e te alr t poie h gvrmna la in loan governmental the provide to failure the ces 34

al exports to Russia between 1865 between1865 Russia to exports al ital was acquired after 1906. In 1906. after acquired was ital for 5.9%, industrial production industrial 5.9%, for an Empire for supremacy in in supremacy for Empire an one of the steps towards steps the of one oenet ogt the sought Government the Duma, which was was which Duma, the ock exchange price list list price exchange ock r government loan was was loan government r investment. Railways investment. i ws upsd to supposed was sia , most probably as a a as probably most , rance. The Franco- The rance. ned the British and British the ned f Emprunts russes Emprunts zr o rn a grant to Czar hr o the of share st large new large st Rault 2004, 2004, Rault ie which tive, lity; and and lity; for y the the , CEU eTD Collection Conclusion 1.4 the governmental intervention. the governmental intervention. Gr from capital of movement Generally, flows. capital free to which liberalism, of victory political the by enabled were environment. investment-friendly an created and stability the to led militar world. Second,thethe of rest the to accumulatedsavings the signi a as acted and era the of market financial development soon was market financial British The distress. continental the ba merchant the of transfer the by also enlarged was investment am The class. middle significant the of emergence and capital led predominance industrial The world. the in predominance military wit coincided study under period whole the First, factors. several capi The globalization. of era first the during surpluses account surpluses were matched by current account deficits in the New New the in deficits account current by matched were surpluses and French British, The (ibid). I War World the to running years res percent 1.3 and 3.3 of surplus the ran who Germany, and France Great imbalances global of side surplus the On 2002). (Taylor valu the reached surplus account current British I, War World the fore from income of inflows the as well as shipping, servicesand mostly sustained was balance account current positive its economy, t mature economy British As from Germany. and France powers continental competition industrial rising face to had Britain Great ra Bian Fac ad emn wr te onre rnig the running countries the were Germany and France Britain, Great In the last third of the nineteenth century and the years running to to running years the and century nineteenth the of third last the In 35

translated in the removal of barriers barriers of removal the in translated ficant facilitator in the transfer of transfer the in facilitator ficant ount of the capital available for for available capital the of ount eat Britain was unhampered by by unhampered was Britain eat nkers to London as a result of result a as London to nkers tal flows were influenced by by influenced were flows tal Britain was accompanied by by accompanied was Britain ign investment. At the eve ofeve the At investment. ign World and Europe. Whereas Whereas Europe. and World h the British industrial and industrial British the h e ntd tts n the and States United he transformed into the most most the into transformed y and naval predominance predominance ynaval and by the export of financial of export the by e of 8.6 percent of GDP. GDP. of percent 8.6 of e Finally, the capital flows flows capital the Finally, German current account account current German d into a complex service complex a into d pectively during the 14 14 the during pectively to the accumulation of accumulation the to the World War I, War World the ags current largest CEU eTD Collection eid. is, hra te ol’ lret cnm ad h major the and economy largest world’s the whereas First, periods. the pre-War period rested on the fixed exchange rates and free and rates exchange fixed the on rested period pre-War the c The different. was mechanism, adjustment the hence and trilemma, capital increasing by characterized were periods both although financial international and countriesrich by swapping asset about dis asset foreign today’s Thus, 249). 2004, Taylor and (Obstfeld debtors are countries industrial major thenowadays whereas positions, net to liabili and asset gross the period pre-War the in Second, decades. the been has it era, pre-War the in creditor largest world’s s rsl o ahrne o od tnad n h ps ad deec t adherence anchors nominal today. and past the in standard gold to adherence of result a as price stable the by characterized were periods both Finally, t of crises market emerging the resembles This 2005). Wandschneider spread quickly and Argentina in began which 1890, of crisis Baring the c malign few were there However, 5). Chapter see standard, payments of balance the of discussion detailed a (for smooth rather The flows. capital massive by accompanied imbalances account witnes periods Both flows. labor and capital trade, through economy economies national of integration unprecedented an by characterized railroads,amenities deficits. or used finance social to budget mos invested were periphery the to countries core the from inflows and Scandinavia Europe, Eastern to mostly directed were exports World, New the of countries the in mostly invested Britain Great However, it must be noted that there were several notable differ notable several were there that noted be must it However, h frt r o goaiain eebe te urn situa current the resembles globalization of era first The 36

s in the major industrial countries industrial major the in s world’s largest debtor in the past the in debtor largest world’s urrent account reversals, such as such reversals, account urrent capital mobility at the cost of cost the at mobility capital mobility, the solution to the to solution the mobility, diversification (ibid). Third, (ibid). diversification ty positions were very close close very were positions ty adjustment mechanism was was mechanism adjustment French and German capital capital German and French ide at Te capital The East. Middle in Bt pros were periods Both tion. both major creditors and creditorsmajor both lassical gold standard of of standard gold lassical military power was the the was power military dutet ne gold under adjustment l it te ul-p of build-up the into tly no h international the into ences between the two the between ences e pritn current persistent sed e 90 ad 1990s. and 1980s he to Brazil (Triner and and (Triner Brazil to o credible domestic domestic credible o rbto i more is tribution CEU eTD Collection permanent shocks to income. As this approach does not differentiate not does approach this As income. to shocks permanent globalThechapter following discusses after the the imbalances bre post-Bre the in countries 107 and I War World before countries fourteen curr of importance relative the tests 6 Chapter shocks, income of on emphasis the with I, War World before countries European seven cha of sources major the examines former The 6. and 5 Chapters pre-War the in balances account current the of determinants main not are imbalances global the of explanations and models current of continued peg thewhereas to developing their world cu a significant part flex towards moved gradually countries developed the of most system, collapse the following hand, other the On policy. monetary independent ie tee iiaiis a wl a dfeecs i i of is it differences, as well as similarities, these Given 37

interest to test whether the the whether test to interest nges in the trade balance of of balance trade the in nges ent account determinants in in determinants account ent time- or place-specific. The The place-specific. or time- akout of the World War I. War the World akout of between various sources sources various between period are analyzed in in analyzed are period of the Bretton Woods Bretton the of ible exchange rates, rates, exchange ible tton-Woods period. tton-Woods rrencies. the transitory and and transitory the CEU eTD Collection billion in Russia in alonebillion (Landes 2003,362). out billion 3.5 sold France while sterling; of million ₤54 another plus

Challenges in a New Era: Development and Participat and Development Era: New a in Challenges 25 Political and Background Economic 2.1 liquidation of their assets liquidation and rising indebtedness. disrup through world the of rest the credit to powers European other capa the diminished It structures. financial and political economic, to catalyst a as served I War World The nation. creditor major of episodes two between interlude an as characterized best is huge assets abroad. Britain sold ₤207 million out of ₤800-900 million in dolla in million ₤800-900 of out million ₤207 sold Britain abroad. assets huge by partly deficit exchange foreign their covered French The 27). 1992, It to million ₤412.5 and Russia to million ₤568 France, to million ₤434.5 Empire, wit countries to million ₤171 including million, ₤1741 some lent had Britain 1918/19, e the until war of outbreak the From Allies. these other to of transmitted Much 27). 1992, (Pollard countries neutral from mostly remainder Ca from million ₤135 USA, the from came million ₤1027 which of million, loans received Britain Great abroad. from borrow to necessary debtor her because billion) 45 to (23 abroad holdings her of half losing An earlier draft of this chapter was presented at at presented was chapter this of draft earlier An The period between the outbreak of the World War I and the end of the of end the and I War World the of outbreak the between period The n re t fnne h wr fot, uoe a fre t liquidat to forced was Europe efforts, war the finance to order In h lqiain f ses a nt ufcet n Erpa pwr s powers European and sufficient not was assets of liquidation The CHAPTERGLOBAL– 2 IMBALANCES, 1914-1945

the 5the ion,” 19-21 June 2009, Budapest. Budapest. 2009, June 19-21 ion,” 38

th

CEU Graduate Conference in Social Sciences: “Old Sciences: Social in Conference Graduate CEU the world’s hegemon being the the being hegemon world’s the the changes in the prevailing prevailing the in changes the o h aon o ₤1365 of amount the to city of Great Britain and Britain Great of city d f h fnnil year financial the of nd tion of their economies, their of tion s were wiped out – 12 12 – out wiped were s of 45, in addition to to addition in 45, of public loans (more (more loans public e major part of its its of part major e World War II War World 25 r investments, r oon found it it found oon aa n the and nada on were loans

aly (Pollard (Pollard aly hin the hin CEU eTD Collection position in 1919 exceeds $12 billion (Eichengreen 1919exceeds in $12 billion 1989, 110). position below that between 1910 and 1913 (ibid). The British creditor position w position creditor British The (ibid). 1913 and 1910 between that below billions, mostlyUnited States)billions, (Landes 2003,363).from the val the twice almost dollars, million 1142 of value the reached York cap foreign the 1928, and 1924 between heyday its In States. United the to 1987, 14). rat a in Britain and States United the from entirely emanated 1930 betwe lending international long-term of billion $14 The 1920s. the throughout to wit lender prewar largest combined third the from Germany borrowing, transformed Foreign loans. other by followed soon was and the sparkled Plan Dawes The 418). 1985, (Fishlow problems reparation at Plan Dawes the when 1924, until limited was investment foreign U.S. the of restoration the to debts war the of settlement the linked rep German to debts war the linked Britain Great and France influence significantly to out turned These Allies. the to debts credi American to component official the also was there However, s trade significant a with war the from emerged States United ass foreign U.S. to added are debts war if magnitude; comparable int transformed was billion $3.8 of position debtor net America’s 334, 347). 1976 (Krasner, in1914 from borrowing direct by more far but francs),gold billion 4.5 than rniin rm nt etr o n motn ceio nation. creditor important an to debtor net a from transition 26 Except for the period of 1900-1905, the United Sta United the 1900-1905, of period the for Except In the postwar period the United States replaced Britain as as Britain replaced States United the period postwar the In British capital exports remained substantial, but the annual f annual the but substantial, remained exports capital British n h ohr ad teWr oiie te ..eooy n lrey ac largely and economy U.S. the mobilized War the hand, other the On

tes was a net debtor until the outbreak of the Worl the of outbreak the until debtor net a was tes 39

foreign lending. As a result, the result, a As lending. foreign urplus and large gold reserves. reserves. gold large and urplus the largest debtor to the world the to debtor largest the arations and the United States States United the and arations the capital flows in the 1920s. the in flows capital the 26 ewe 11 ad 1919, and 1914 Between o a net creditor position of position creditor net a o chief capital exporter. The exporter. capital chief tor status, namely the war war the namely status, tor their Allies (more than 30 than (more Allies their ets, the U.S. net creditor creditor net U.S. the ets, low averaged 11 percent 11 averaged low io of two to one (Felix (Felix one to two of io ue of London foreign foreign London of ue eakened also relative relative also eakened lending to Germany Germany to lending tempted to fix the fix to tempted ital issues in New in issues ital reparations, h en 1920 and 1920 en celerated its its celerated d War I War d CEU eTD Collection einn o te a. rm pi t Jn 11, mrcn xot t E to exports American 1915, June to April From War. the of beginning British-American during Relations 2.2 theFinancial 1987,14).(Felix Eas and colonies its in mostly invested and 1927 until lending long-term cre prewar largest second the been had which France, Finally, 418). (Fishlow 1931 and 1929, 1925, in again and 1922 before embargoed were governments capi Therefore, payments. of balance weakened the consideration into Further 4). table 418, 1985, (Fishlow dollars million 587 of issues capital British financial policy during the World War IBritish financial War during the (see policy below). World out turned rate exchange and finance war the of problems the So Brit the on pressures depreciation in resulted exports, thesefor dol for pounds exchange to need resulting the and Europe to exports U.S risi The 182). Alstyne1933, (van 1914 in period corresponding the over doubled tts Te ae f h rs i US eprs o uoe a b may Europe to exports U.S. in rise the of pace The States. defi account current accumulating started Britain and overseas the c imports these of Most munitions. of kinds various and oil cotton, food, included factories war its for supplies the of much importing itself product war bega services financial and to shipping of as well as merchandise, exports from switched capacity productive British S United the on dependent financially so become Britain Great did financ to willingness U.S. the on dependent overly itself found Britain c situation this war, the of outbreak the after However, States. Before the War, Great Britain was the most important foreig important most the was Britain Great War, the Before 40

(Pollard 1992, 27). The main items main The 27). 1992, (Pollard War ish pound, which began falling. beganwhich pound, ish n to fall off and Britain found Britain and off fall to n dcmne sne h very the since documented e to be the two major issues of issues major two the be to hanged incredibly fast and and fast incredibly hanged n investor in the United the in investor n i aant h United the against cit ae? y al 1915, early By tates? e its war efforts. How How efforts. war its e io, ihrw from withdrew ditor, o, t eprs of exports its ion, a fos o foreign to flows tal lars in order to pay pay to order in lars more, Britain took took Britain more, Erpa allies European t urope more than than more urope ng amount of of ngamount ame from ame 1985, 1985, CEU eTD Collection New York and that ₤100 million in gold would be shipped to America (i America to shipped be would gold in million ₤100 that and York New problems connected with the payment of British gove British of payment the with connected problems Tr the at in call would Grenfell that was procedure ainl iy ak vn ltn 13, 8) Similar 182). 1933, Alstyne (van Bank City National Treasury (Burk 1979, 352). In February 1917, the Tr the 1917, February In 352). 1979, in (Burk Treasury developments, business and financial American of in firm Morgan the to instructions chancellor’s the Anglo- the great to compared modest werevery loans Howev (ibid). institutions banking other by Germany 28 in Harjes Morgan, and Philadelphia, in Co. & Drexel rate. 27 raise to attempt United to priv States Reading, awas loan onthe the sent to hea mission, Anglo-French joint a So measures. temporary only were their from purchased be would securities American that agreed government British The 353). 1979a, (Burk million $17 totaling week following cover to million $4 only had Morgan’s and war the of outbreak the at 4.86 officials. advise and France; and Britain of operations exchange foreign handled f goods, purchased Morgan’s War, the to entry U.S. the Until 85). 2000, (Horn gove French the for position same the assumed it and U.S. the in agent Briti the appointed officially was it 1915, January In war. the of British the for agent financial a as act to started Morgan’s banking the by floated were France) also (and Britain Great marke private U.S. the in predominantly funds sought Britain Great were negotiations The 1915. September in Co. & Morgan P. J. by headed 60). 60). had who Lever, Hardman S. by headed was mission The The first loan ever, consisting of a 10 million do million 10 a of consisting ever, loan first The Co & Morgan P. J. of consisted Morgan of House The 28 On 14 August 1915, the rate of exchange dropped to nearly $4.70 to the pound pound the to $4.70 nearly to dropped exchange of rate the 1915, August 14 On The first major loan was floated after a significant drop in in drop significant a after floated was loan major first The From the beginning of the World War I until the end of the U.S. neutra U.S. the of end the until I War World the of beginning the From h fnnil iso oee dlbrtos ih gop f Ameri of group a with deliberations opened mission financial The 27

New York. Further, Morgan personally kept Grenfell kept personally Morgan Further, York. New easury each day to talk over the trend in the excha the in trend the over talk to day each easury llar advance to France in October 8, 1914, was made was 1914, 8, October in France to advance llar er, due to the growing Allied demand for U.S. goods U.S. for demand Allied growing the to due er, French loan described below. below. described loan French rnment debts in the United States, and then he woul he then and States, United the in debts rnment easury sent its own financial mission to the United the to mission financial own its sent easury 41 omto aot hc Gefl te pse o t th to on passed then Grenfell which about formation ai (on 00 8) “ni te pig f 97 t 1917 of spring the “Until 85). 2000, (Horn Paris his office in the Morgan office in New York (ibid, York New in office Morgan the in office his modest advances were made to France, Russia, and and Russia, France, to made were advances modest

. in New York, Morgan Grenfell & Co. in London, London, in Co. & Grenfell Morgan York, New in . government soon after the outbreak outbreak the after soon government British owners for re-sale in in re-sale for owners British house J. P. Morgan & Co. Co. & Morgan P. J. house sh government’s purchasing government’s sh the British pound exchange exchange pound British the t. The major loans for for loans major The t. d British and French French and British d rnment in May 1915 1915 May in rnment bid). However, these these However, bid). ded by the Earl of of Earl the by ded ate market. payments due the the due payments hard, guided by by guided hard, a financiers can loated loans, loated lity in 1917, 1917, in lity nge rate or or rate nge therefore abreast abreast States. d cable cable d by the the by , these these , from 359- he e e CEU eTD Collection (Coopernetted 1976,213). than less $475million after which, dollar the on cents 96 was price syndicate a However, 200 276 12 byoversubscribed was and dollars million 500 to Itamounted 193). 1933, unsec only the and advance single largest the was loan Anglo-French 213) 1976, (Cooper million $750 mi even or billion $1 borrowing of expectations The sentiments. pro-Allied than rather principles financial 29 ofand goldcollateral shipments as 214). (ibid, Briti by backed borrowing longer-term and drafts commercial Trea British The loans. secured only floated Britain Thereafter, a to led This 213). 1976, (Cooper distribution future for balance the up munitions Morg of house the and unsubscribed remained million large$180 1915, 14, December six although Thus, 354). 1979a, off sixty-day the when loan, the of million $100 bought manufacturers Burk and 187; 1933, Alstyne van S and German significant with West and Midwest the in loan the T industrialists. or institutions financial as such subscribers, count the of part eastern the in concentrated were subscribers give to a Wilson blessingpublic Lansing, the 1976,216). get loan to to (Cooper who tried a McAdoo Gibbs William Treasury the of Secretary the from tra a such against or for either action no take would “[p]arties and loan the towards position cagey a took himself Wilson 215). 1976, (Cooper f the with dealings first administration’s Wilson the formed loan Britain and France had pledged both to keep, and t and keep, to both pledged had France and Britain Further humiliation followed when the loan was offered to the public. public. the to offered was loan the when followed humiliation Further Except for the short-lived ban on loans at the outbreak of the war, the of outbreak the at loans on ban short-lived the for Except

o spend the loan wholly, in the United States(Burk theUnited wholly,in the spend loan o 42

29

his reflected the low support for support low the reflected his ry and consisted mostly of large large of mostly consisted and ry nsaction,” differing in opinion opinion in differing nsaction,” sh-owned American securities securities American sh-owned d ertr o Sae Robert State of Secretary nd candinavian settlements (see (see settlements candinavian uy eid pn short-term upon relied sury inancial side of diplomacy diplomacy of side inancial so qiky abandoned quickly ssion deductions for expenses, expenses, for deductions ering period expired on expired period ering ured loan (van Alstyne (van loan ured change in the policy. policy. the in change the Anglo-French Anglo-French the . The resulting resulting The . an itself took took itself an ot f the of Most argued that that argued , 1979). 1979). , dollars.

CEU eTD Collection oe. tog gvro o te eea Rsre ak f e Yr, wa York, New of Bank Reserve Federal the of governor Strong, power. them on to the British onto them governmenthigher the form in of prices. maker munitions all of incomes gross the on tax profits direct 12.5% up dependence into inquiry comprehensive a initiate to 1916 October and

Federal Reserve Board was removed at a critical juncture (ibid). at removed ajunctureBoardFederal critical was (ibid). Reserve of supporter effective most the So (ibid). 1917 of spring the until convales in remain to had and tuberculosis to victim fallen had Strong (Coope economy world the in primacy American of day the hasten Engl easie and of loans foreign Bank that believed the and finance supplant international to York, New in bank his especially America enhancing for considerations were there Second, 215). 1976, (Cooper relaxing against initially were Miller) Adolph and Warburg M. pro-Allied harbored Hamlin) Sumner Charles and Delano, Frederic board the of members some Whereas mixed. was 1914, November since 30 against American trade.American against against commercially retaliate to President the powers empowered Central the with trading of suspected or accused firms Ame 87 some of blacklist a published Britain When leaders. its D in rising Easter the with dealing British the andcensorship the blockade, shipping British 218) the 1976, with unsatisfied Cooper were Americans or 356; 1979a, Burk (see tensions diplomatic rising by soured (Sept. 5, 1916), 13790. 1916), 5, (Sept. The retaliatory measure was an amendment to the Re the to amendment an was measure retaliatory The h Aeia rtlaoy eilto rmtd h Biih g British the prompted legislation retaliatory American The The attitude of the Federal Reserve System, which had then been been then had which System, Reserve Federal the of attitude The hogot 96 te eain bten h Uie Sae ad ra Bri Great and States United the between relations the 1916, Throughout 30 The Administration and Congress amended a revenue bill to slap a slap to bill revenue a amended Congress and Administration The

43 venue Act of 1916; see Cong. Rec., 64 Cong., 1 sess 1 Cong., 64 Rec., Cong. see 1916; of Act venue

ublin, especially the execution of of execution the especially ublin, rican and 350 Latin-American 350 and rican cei fr a tae would trade war for credit r onre ta discriminated that countries loans to the Allies from the the from Allies the to loans n uy 96 Congress 1916, July in rdt o te a trade war the for credit vrmn i September in overnment sentiments, others (Paul others sentiments, r 1976, 216). However, However, 216). 1976, r rts cbe n mail and cable British s, who promptly passed passed promptly who s, n a te edr in leader the as and cence from June 1916 June from cence on American trade trade American on (Benjamin Strong, (Benjamin in operation only only operation in td h Fed, the nted n financial financial n tain were were tain . The The . . .

CEU eTD Collection rcial ulmtd oe (opr 96 20. Tu, nta o a repr a of instead Thus, 220).” 1976, (Cooper money unlimited practically ucae, rti fotd nte la truh ogns o $5 mlin s million, $250 for Morgan’s through loan another floated Britain purchases, by the Bankers trust Company at the end of October 1916, one of the M the of one 1916, October of end the at Company trust Bankers the by bills, intending them to be bought by American banks and repeatedl and banks American by bought be to them intending bills, o dpstd ih h Biih rauy wud o b eog t fi to enough be not would – Treasury British the with deposited not securities American British-owned of sales that clear was (ibid).conciliation toward States the United swe so America in sentiment keep to but States, United the with mainta to merely not is job “our committee, interdepartmental Foreig the of Percy Eustace Lord wrote circumstances,” these b would securities and gold of reserves British 1917, March By 356). 1979a, in found be to had million ₤2 about war, the of prosecution the for daily Tre the which million ₤5 the of report, the to According 219). 1976, (Cooper 1976, 222-227). 1976, 222-227). Bur (see crisis financial British serious a of because abandoned Janua in floated be to – loan unsecured an for plans the However, 357). O in later, month a only loan secured million $300 another by followed (Bur 1916 September in securities foreign and American Canadian, the amount (estimated to half a billion to billion dollars by Da by dollars billion to billion a half to (estimated amount the Reserve Pre Federal The 22-3). and 1976, (Cooper issue planned board the about Wilson the inform to 19 November on Washington to traveled Davison, P. indus French million $100 a of disapproved privately had Board Reserve ( arrived collateral more until crisis exchange brewing the In the meantime, Britain struggled to finance its imports of food a food of imports its finance to struggled Britain meantime, the In In November 1917, Morgan’s decided to issue short-term, unsecured Britis unsecured short-term, issue to decided Morgan’s 1917, November In 44

Burk 1979a, 357). Since the Federal the Since 357). 1979a, Burk – by then subject to a penal tax if tax penal a to subject then by – vison) would force the British the force would vison) n Office, the chairman of the of chairman the Office, n n eety redy relations friendly decently in k 1979a, 357-60; or Cooper or 357-60; 1979a, k y renewed, to overcome overcome to renewed, y t ht t il ed us lend will it that et 17a 34. t was It 354). 1979a, k organ partners, Henry Henry partners, organ North America (Burk America North ry 1917 – had to be to had – 1917 ry trial credit proposed credit trial nance the alliance alliance the nance ctober 1916 (ibid, (ibid, 1916 ctober Board feared that that feared Board nd arms. When it When arms. nd isal, Percy urged urged Percy isal, e gone: “Now, in in “Now, gone: e asury had to find find to had asury ecured by by ecured h treasury h sident CEU eTD Collection to the United States in January the United in to States 227). 1917(Cooper 1976, represe own its sent Treasury British Administration, U.S. the in loose To (ibid). America North in week a million $83 of average wa Britain crisis, the by occasioned orders of cancellation the H 360). (ibid, payments American for hand in money week’s a than more (ibid).Britai bybillion fallen $1 had marketsecurities the Within 358). 1979a, (Burk rate exchange the maintain to sterling of worth ne buy to had Morgan’s and tumbled, stocks war American and bonds Allied (ibid).” (ibid).” positi this impair to not careful be must We generation. a for i events, of course natural the in which, power, financial international pos a attained now has States United “[t]he noted, board the warning, (ib loans unsecured of case the in particularly data, authoritative investo private cautioned it step, unprecedented an In 222). 1976, (Cooper ke of policy a pursue and borrowers foreign to credit much too extend Am urged statement The Wilson. president and Board Reserve Federal short-term carefully 357). issues (Burk 1979a, private the to note a adding by warning the strengthened and mediation Allies the pressure to situation the use to decided also Wilson 223). the in Republicans the backed had Street Wall because strained admi Wilson the and Morgan of House the between relations Furthermore, b the of liquidity the lessening bonds, long-term into it convert to When the warning was published in in published was warning the When h pbi saeet sud n oebr 7 11, a a on statem joint a was 1916, 27, November on issued statement public The New York Times York New 45

n struggled on, sometimes with little with sometimes struggledon, n on 28 October 1916, the price of price the 1916, October 28 on on of strength and independence independence and strength of on s in February 1917 spending an spending 1917 February in s recent election (Cooper 1979, (Cooper election recent ntative, Sir Hardman Lever, Hardman Sir ntative, n the Morgan tie unpopular unpopular tie Morgan the n id). As justification for the for justification As id). anks (Burk 1979a, 357). 357). 1979a, (Burk anks t could not have reached have not could t to further his plans for for plans his further to eping themselves liquid liquid themselves eping erican bankers not to to not bankers erican ition of wealth and and wealth of ition investor to consider to investor owever, even with even owever, rs to seek full and and full seek to rs a week values in in values week a arly $20 million million $20 arly itain were nistration n o the of ent CEU eTD Collection began planning for a huge American war loan, the Liberty Loan, a Loan, Liberty the loan, war American huge a for planning began passed by Congress which would provide for the purchasing of the bonds the of purchasing the for provide would which Congress by passed purchase Allied bonds (Burk 1979b, 410). Discussions were not successful successful not were Discussions 410). 1979b, (Burk bonds Allied purchase

Treasury, William Gibbs McAdoo, asked them not to do so because the because so do to not them asked McAdoo, Gibbs William Treasury, t but 1917 February in loan collateral a float to intended British million $200 about of loan immediate an make to government American U the to sent was affairs, foreign of secretary the Balfour, J. m political high-level A 360). 1979a, (Burk Treasury American the with B 1917, April 6 on war the entered States United the Once Germany. to advance $200 million in three installments in May (ibid, 362). advance Mayto three 362). in in (ibid, installments $200million tr American with mission Balfour the of meeting formal first F (ibid). debts war the of genesis the – government American Briti the tide to loan temporary a make to agreed McAdoo Instead, b the by Morgan’s at million $350 nearly of overdraft an in resulted ther was, loan The (ibid). funds available pre-empt would British suspending payments in New York (ibid). suspending New in (ibid). York payments Brita brought June 26 on funds promised over pay to refusal Treasury’s Treas American the which for purpose only the – purpose” “war of rate the support to British the by required amount the accept t afraid was McAdoo First, communication. of lack British the with a rate exchange the were issues main two The representation. betw tensions as well as finance, the find to struggles British Finally, in February 1917, the United States broke off diplomatic diplomatic off broke States United the 1917, February in Finally, However, these funds were not sufficient and the summer 1917 was comp was 1917 summer the and sufficient not were funds these However, 46

easury officials, McAdoo agreed agreed McAdoo officials, easury inally, on 2 May 1917, at the the at 1917, May 2 on inally, e MAo ad h British the and McAdoo een nd McAdoo’s dissatisfaction dissatisfaction McAdoo’s nd nited States to convince the the convince to States nited exchange in New York as a a as York New in exchange sh over until a bill could be could bill a until over sh nd McAdoo was afraid the the afraid was McAdoo nd e .. ertr o the of secretary U.S. he eginning of April (ibid). April of eginning ury was empowered to to empowered was ury not would Congress hat efore cancelled, which which cancelled, efore ritain opened relations opened ritain in to within hours of hours within to in ission, headed by A. by headed ission, American Treasury Treasury American of the Allies by the the by Allies the of (ibid, 360-1). The 360-1). (ibid, and the American the and eain with relations licated by licated CEU eTD Collection by the United States (Burk 1979a, 364-5). He concluded (Burk 1979, 365): 1979a, 364-5). (Burkby concluded (Burk 1979,365): He the United States that Balfour to cabled McAdoo July 12 on When British. the by provided

rate of exchange and the remaining gold, the rate would have to give way (ibid, 412 rategiveexchangeremainingwould haverategold, and(ibid, of the way to the suggeste therefore Keynes (ibid). purpose this for left million Jul 23 by but Ottawa, in am England of by, bank the for York held gold New importing in rate the maintaining been had Lever meantime, reserves currency the lowering by se credit be British could destroying more no that McAdoo warned had chancellor the Memorandum in million ₤305 of total a States United the to exported had Britain be the Since again. once heavy advanc were pound monthly on pressures agreed the 1917 in July came aid financial cable, this After be to hadrate exchange the maintain to funds American using of question of but days. months conc This collapse. will Alliance the of fabric financial whole UnitedSta the in expensesour full in meetcan Government States are America in payments for available resources our short In other Allies by the United Kingdom has been more than double the a the double than more been has Kingdom United the by Allies other financi war the into came America since even but Allies, other t addition in million ₤145 nearly Britain given had government American that acknowledged He 410). 1979b, Burk 365; 1979a, (Burk million ₤90 only them given United St while the 1917, 14July to from 1April million ₤194 nearlygiven the Allies sta 1917 July 23 on sent cable the and specifications Chancellor’s the ( statement detailed a provided finally Treasury British the burde entire the assume can America that mean cannot cooperation inform of lack the about complaints McAdoo’s was problem second The 47

ibid). Keynes drafted the reply to to reply the drafted Keynes ibid). d that in a choice between the the between choice a in that d lusion will be a matter not of not matter a be will lusion Br 17b 42. n the In 412). 1979b, (Burk exhausted. Unless the United the Unless exhausted. al assistance afforded to the the to afforded assistance al tes, includingthe exchange,tes, actual gold and in 23 July 23 in and gold actual n of financing the war,” the financing of n ssistance afforded them afforded ssistance y there was only ₤10 ₤10 only was there y still settled. Late in settled. still ted that Britain had had Britain that ted ginning of the war war the of ginning o the funds for the for funds the o es. However, the the However, es. ong other things, things, other ong “America’s “America’s nt without without nt -3). ates had ates ation ation the the CEU eTD Collection billion. Of that total of $34 billion approximately 25 percent was was percent 25 approximately billion $34 of total that Of billion. rvd a acut f h wr iacn. oa fdrl government federal Total financing. war the of account an provide ac 11 ad a 11 wr $2 ilo ad diin t Tesr cs ba cash Treasury to additions and billion $32 were 1919 May and 1917 March ntd tts eid n eea sucs f iacn. Friedman financing. of sources several on relied States United fear growing to led this and hand, whip hesitate the United use would not States to it. Treasury 1918that during the held who longer any doubted over control resign betwee relationship to financial changed the of British symbolic concession the forced had Treasury American The overdraft 369): (ibid, Mor with deposited securities) other and American (British-owned entitl be should they obligations, these retire to help to money t argued Americans the However, 366-7). 1979a, (Burk payment part as ta was this and August in paper Treasury short-term of issue an pe the gave McAdoo begin. would overdraft the of repayment the when know to a Treasury American the at called Davison 1917 July In 365). 1979, (Burk Loan m the keep to loan a at floatingoverdraft the concerned war the fromduring conflict last The refrained request McAdoo’s at 1919(Burkto 371). 1979a, Britain 1917 to over from government whereas $4000million lent American $800 million, the althoug countries, other in borrowing and securities selling gold, f raising by government American the of independence financial some Apri After war.the throughout 4.73 at remained rate The 413-4). (ibid, ex the meet to August for million $50 of advance additional an communic to led was and Exchange on Memorandum the as well as Spring-R Cecil policy, Sir Washington, new in Ambassador The British the by McAdoo n re t poie h las a wl a t fnne h Ameri the finance to as well as loans, the provide to order In 48

ken up by the banks involved involved banks the by up ken ed to take over the collateral collateral the over take to ed h the amount raised was only only was raised amount the h financed by explicit tax plus tax explicit by financed n the two countries: no one no countries: two the n Morgan’s, when the British the when Morgan’s, and Schwartz (1993, 221) 221) (1993, Schwartz and re fe frte Liberty the for free arket gan’s as security for the the for security as gan’s expenditures between between expenditures l 1917, Britain retained retained Britain 1917, l their own assets, a a assets, own their a wr fot, the efforts, war can ice on 31 July 1917 July 31 on ice hat if they provided provided they if hat nne y shipping by inance hne situation change n h British the in nd demanded demanded nd rmission for rmission acs $2 lances ated to to ated CEU eTD Collection buying war bonds, he enlisted leading artists to paint posterspaint to leading artists enlisted he bonds, warbuying played the interwar in a significant role period. the Victory Loan).Victory the bil (21.455 dollars billion 16.945 was Loans Liberty of amount total The 1919. A in Loan Victory one and 1918 October 24 and 1917 June 15 between issued were Four 12).” 2004, (Rockoff Soldier a Save to Scout “Every slogan the under The (ibid). stars Hollywood featuring rallies bond giant organized accept reparations Germany. war directlyrefusedfrom to debts and li no was there that insisted States United the However, States. repay to it used who Allies, to reparations paid Germany which Thus Allies. to debts war the of repayment on re insisted it any However, expect not did and Versailles of Treaty the sign not did normal market forces. They suggest that market forc market that suggest They forces. market normal direct borrowing. wa of amount highest the seen, be can As prices. in rise the through implic an largely as period that for regarded be may which percent 5 and borrowing; explicit by percent 70 receipts; nontax 2.3 War Debts War 2.3 Kang and Rockoff 2006). In order to make the public to express its express to public the make to order In 2006). Rockoff and Kang patri “capitalizing of policy aggressive an following by Loans, 31 However, Rockoff (2004) and Kang and Rockoff (2006 Rockoff and Kang and (2004) Rockoff However, McAdoo hoped to create a broad market for government bonds, the f the bonds, government for market broad a create to hoped McAdoo The link between the reparations and the war debts was peculia was debts war the and reparations the between link The 31 These Liberty Bonds served as an instrument for the war deb war the for instrument an as served Bonds Liberty These

es played a more important role than the patriotism the than role more important a played es 49

) argue that patriotism proved to be a weak offset offset weak a be to proved patriotism that argue ) urging the purchase of bonds and bonds of urgingpurchase the it tax on money balances levied balances money on tax it nk between the reparations and and reparations the between nk their war debts to the United the to debts war their otism” (see Rockoff 2004; 2004; Rockoff (see otism” b drc mny creation, money direct by Boy Scouts were enlisted enlisted were Scouts Boy parations from Germany. Germany. from parations , a situation emerged, in emerged, situation a , support for the war by war the for support r financing came from came financing r r. The United States United The r. mu Liberty amous lion, including lion, iet Loans Liberty ts, which ts, pril-May pril-May . . to CEU eTD Collection akr t cnut h las te ulcy niae dsprvl ol de could disapproval indicated publicly the loans, the consult to bankers legal no had Department the Although 33). 1926, (Dulles issue particular United States, and once again in April 1926, after agreement had been r been had agreement after 1926, April in again once and States, United reac to failed Washington in delegation French a when 1925 September re was ban The 32). fn. 26, 1986, Kindleberger in cited 21-23, 1950, (Feis debts atte not did France because ban informal the by 1924 November in York Fr prevented State of Department The loan. a raise to attempt is example notable most The issue. loan the of marketability or was there whether to as bankers the advice could it so State inform should loans foreign making contemplating bankers American that Amer the in floated being issues bond foreign of number increasing w in statement public a issued State of Department 1922, March press of means a as market capital York New the to access b individual an on debtors its with agreements repayment negotiated Fore War World the created it In1922, debts. repaythe to Allies

debt to thedebt United (Kindleberger to States 1986,25). the to up only so do would but them to owed debts collect to but choice i collecting on insisted had States United the inasmuch that stated (Fede Greece and Portugal, Rumania, repr Yugoslavia, Italy, of Governments diplomatic the to and London in ambassador French to addressed 25). 1986, (Kindleberger 1922 1, August of note Balfour the in especially Presi and George Lloyd between letters in up ending 1920 of exchanges forwar put was (1920), Keynes in advanced originally debts, war of This was in contrast to the reasoning of Allies. The British sugg British The Allies. of reasoning the to contrast in was This The United States rejected tries to cancel the war debt and and debt war the cancel to tries rejected States United The 50

the intervention in the French French the in intervention the r t clet h dbs O 3 On debts. the collect to ure ance from borrowing in New in borrowing from ance ign Debt Commission, which Commission, Debt ign ts war debts, Britain had no had Britain debts, war ts hich, after referring to the the to referring after hich, was not objection to any any to objection not was attempted to pressure the the pressure to attempted asis. Furthermore, it used it Furthermore, asis. ican market, it requested it market, ican d in a series of formal formal of series a in d estion for cancellation for estion eached but no French no but eached h agreement with the with agreement h ral Reserve 1922). It 1922). Reserve ral limit of the British the of limit the Department of Department the esentatives of the the of esentatives pwr o require to power p t stl war settle to mpt et isn and Wilson dent The note was was note The to the stroy newed in in newed CEU eTD Collection best interests of this country to permit foreign governments foreign permit to country this of interests best ieenh etr, ple the applied century, nineteenth Amer that noted be must it debts, war unsettled with countries the Reparations 2.4 of frontiersacross 915,fnand goods 15). capital (Costiglia 1977, minimiz or eliminate to was 1920s the in policy economic American the initiation of the 1931. Youngthe initiation June the April Hoover in 1930to in Plan moratorium 1930) to (1924 YoungPlan the to DawesPlan the from (2) 1924; in DawesPlan Department were notified that this GovernmentDepartment this that objected were such notified to financing. cons bankers and private prohibition, the in and included were concerned country foreign municipalities States, borders. our States, within United requirements the to debts their adjust to effort reasonable tha decided was it consideration, much after 1925, year the in Early expressed an in by article was of (D the Mellon Administration Secretary Dawes by led conference the in part take to debtors U.S. other and ratification for Chamber the to it submit to dared government not honor their obligations to the United States and to its citizens. the United and to honor States its not their to obligations f to permitted f not be resources of our that demands development interest national and reconstruction economic the in work at resources country every desire while indebtedness,government has this settle its and to wa the for responsibility assigned which Treaty, Versailles 32 For an overview, see Kindleberger (1986, 17-26), M 17-26), (1986, Kindleberger see anoverview, For The history of reparations falls into three periods: (1) from (1) periods: three into falls reparations of history The hl te ntd tts s eutn t eet rsue y t by pressure exert to reluctant is States United the While h bss f emn' rprto bres r Atce 3 and 231 Article are burdens reparation Germany's of bases The However, despite these occasional interventions and frowning on the pri the on frowning and interventions occasional these despite However,

laissez-faire oulton and Pasvolsky (1932) or Marks (1978). (1978). Marks or (1932) Pasvolsky and oulton 51 attitude to the capital flows. The thrust of of thrust The flows. capital the to attitude

which refused to adjust or make a make or adjust to refused which r to Germany and her allies and allies her and Germany to r o iac ay oto o their of portion any finance to (ibid). This ban forced France forced ban This (ibid). low into countries which do which countries into low icans, just like British in the in British like just icans, his means on any foreign foreign any on means his (see above). The position The above). (see e barriers to the free flow free the to barriers e Versailles in 1919 to the to 1919 in Versailles nepie wti the within enterprises t it was contrary to the the to contrary was it t ulles 1926,36-37): ulles oreign nations, our our nations, oreign ril 22 f the of 232 Article to see its surplus see surplus to its ulting the State State the ulting ; and (3) from (3) and ; vate loans to loans vate 32

CEU eTD Collection od wr t poie o 5 itrs fo 12; h “” od wr t were bonds “C” the 1921; from interest 5% for provide to were bonds belligerency of each as an Allied and 'Associated P 'Associated and Allied an as each of belligerency rsn Tet, o ae opee eaain o all for reparation complete make to Treaty, present from the air, and in general all damage as defined defined as damage all general in and air, fromthe of diminutions permanent account into taking after rec Governments Associated and Allied The 232. Art. allies. her and t of consequence a as subjected been have nationals Associ and Allied the of population civilian the to done. damage the all for compensation make to Germany required occupation costs and governmental reparations claims (ibid). occupationgovernmental claims costs and reparations indivi private of marks gold million 400 Al over received 235).States United 1978, (Marks dyes reparations to right its renounced it when 1922 s regular received it and marks) gold billion 6 (nearly billion $1.5 Germ upon claims had Repa States United the the belief, by common to determined Contrary be to was damage the of amount total The g billion 20 of payment interim an make Germany that specified 33 totaling 12, “Series B” totaling 38 and “Series C” totaling 82 bi 82 totaling C” “Series and 38 totaling B” “Series 12, totaling series three Commission Reparation the to over hand to supposed was intere 6% or 5 with marks billion 132 at sum the fixed Commission unda (Britannica, payments German of percent 8 Belgium and 10 Italy p Francewon 52 (ibid). them be to shared between was debt from Germany in percentages main the on 1921) May until out being not Commission (Britannica,actually be to undated). paid Germanyby Allie against balance to much as existed and paid were series until issued be not would latter The 301). 1928, (Feilchenfeld coupons without Governments, however, require, and Germany undertak Germany and require, however, Governments, damage and loss the all causing for allies her and “Art. 231. The Allied and Associated Governments a Governments Associated Alliedand The 231. “Art. h Pwr hd led are a Sa ofrne n 90 te findi (the 1920 in Conference Spa at agreed already had Powers The

in Annex I hereto. .... (cited in Feilchenfeld, 192 in Feilchenfeld, (cited .... hereto. AnnexI in ower against Germany by such aggression by land, by land, by aggression such by Germany against ower such resources which will result from other provisi other from result will which resources such to which the Allied and Associated Governments and and Governments Associated and Allied the which to td oes n t ter rpry uig h period the during property their to and Powers ated he war imposed upon them by the aggression of Germa of aggression the by them upon imposed war he 52 ffirm and Germany accepts the responsibility of Ger of theresponsibility accepts Germany and ffirm ognize that the resources of Germany are not adequa not are Germany of resources the that ognize es, that she will make compensation for all damage damage all for compensation make will she that es, such loss and damage. The Allied and Associated Associated and Allied The damage. and loss such

s’ debts to the United States as States United the to debts s’ llion marks. The “A” and “B” and “A” The marks. llion old marks (Marks 1978, 233). 233). 1978, (Marksmarks old hipments of dyes until late until dyes of hipments st in April 1921. Germany 1921. April in st 33 duals claims, Rhineland claims, duals The Versailles Treaty Treaty Versailles The any amounting almost amounting any of bonds, “Series A” A” “Series bonds, of ted). The Reparation Reparation The ted). which the reparation the which ain Commission. ration o be handed over over handed be o ercent, Britain 22, 22, ercent, Britain the first two first the oehr the together, 8, 300).” 8, ng of the the of ng ons of the the of ons sea and and sea f the of many many done done their their ny te, CEU eTD Collection and April due to a to due April and doub rate dollar the as well as prices German hyperinflation.

marks. differencea overallThe (ibid). Germans by cededterritories the as claimed was marks billion 12 almost of difference The 19). bil 20 paid having for credit claimed Germans deliveries, and ships billion 7.9 that calculated Commission the Whereas paid. already same period of 1922 (Kindleberger 1986, 21). same 1986,21).(Kindleberger period of 1922 with compared costs, over $625 000 collected French the months, four first se occupation, Ruhr the to leading events the of overview detailed a industr steel and coal German the of centre the Ruhr, the occupy to against was (Britain one to three of vote a by default coal the Commis Reparation the 1923, 9, January on However, default. timber on taken (Williams Troy of Horse Wooden the of days the since relations imp so played never had timber probably that delegate British “I France. to timber of delivery delayed a of because default decl Commission Reparations the moratorium, the of end the at However, econom German the that hope the in moratorium six-month a Germany Reparations the 1922 May 31 On below). (see accelerate to started mark The Germany. of hold got crisis economic an meantime, the ear in met were payments 1921 The 5). 1985, (Dornbusch data 1925 using about to amount would which expenses, occupation to addition in exports hr ws dsue ewe te lid ebr ad Germany and members Allied the between dispute a was There Germany was required to pay 2 billion gold marks a year, plus 26 plus year, a marks gold billion 2 pay to required was Germany uig h ocpto te nlto ta bgn o ceeae n 1922 in accelerate to began that inflation the occupation the During Reichsbank intervention in the exchange market (Dornbusch 1985, 7). The 7). 1985, (Dornbusch market exchange the in intervention 53

mounted to almost 47 billiongold47 almost to mounted t was remarked at the time by the the by time the at remarked was t led each month, except of March of except month, each led ) and by the same vote, decided decided vote, same the by and ) rat pr i international in part a ortant 1932, 188).” No action was action No 188).” 1932, had been paid in securities, securities, in paid been had ies (Marks 1978, 244. For For 244. 1978, (Marks ies e Cornebise 1972). In the the In 1972). Cornebise e lion (Kindleberger 1986, 1986, (Kindleberger lion value of state works in in works state of value collapsed and inflation inflation and collapsed omsin granted Commission about the amounts amounts the about percent of German of percent $50 million in the in million $50 6 percent of GNP of percent 6 y would recover. recover. would y ly 1922 (ibid). In (ibid). 1922 ly ared Germany in in Germany ared sion declared sion prld into spiraled CEU eTD Collection bonds (Finletter 1925, 256). On November 30, 1923, the Reparation Commission Commission Reparation the 1923, 30, November On 256). 1925, (Finletter bonds an secure to estate real Germany’s on mortgage a of powers billion gold marks in the first year and rise to 2.5 billion in the in billion 2.5 to rise and year first the in marks gold billion Reichsmark reparat of amount overall the However, 21). 1986, (Kindleberger percent than 1783 machines with 30 paper factories working factories paper with30 machines than1783 p 133 that immense so was notes for demand the that pa made firms how on stories include accounts Other p were Taxis rising. was price the than slowly more chaired by Charles G. Dawes. G. Charles by chaired Germa of currency” the stabilize to taken be to measures the mea the “consider to Experts of Committee First the of Report known. Keynes reports how people would order two be two would order people how reports Keynes known. 35 1923 June in 667 16 to and October in 485 to June, (Kindleberger 1986,20). in 370 to 1922 May in dollar exchange The 7-8). (ibid, days) four than less in doubles level percent 20 (at November in percent 20.9 to finally and September, Aug in percent 6.5 to July in day per percent 3.5 from rose inflation 34 or upward changed prices gold if i.e. prosperity, world in changes paym annual of schedule The improved. economy German once increase would payments reparation annual Germany’s First, following. the prese Plan Dawes resulting The reparations. the pay it make emn iacs ol b rognzd ne te oeg supervisi foreign the under reorganized be would finances German occupa Allied theby evacuated be areawould Ruhr the unchanged.Second,

Dawes received a Nobel Prize for the Dawes Plan. Plan. the Dawes for Prize Nobel a received Dawes lif of stories “The observed: 7-8) (1985, Dornbush In June 1923, the German government made a proposal to the Allied a Allied the to proposal a made government German the 1923, June In , replaced the old old the replaced , 34

Rentenmark

35 The main aim was to stabilize Germany and find the way t way the find and Germany stabilize to was aim main The . The conversion rate was a trillion trillion a was rate conversion The . referred to streetcars because you paid at the end end the at paid you because streetcars to referred full time for the government needs.” needs.” thegovernment for fulltime yments of workers by furniture van. Schacht (1927) (1927) Schacht van. furniture by workers of yments rinting firms produced notes for the government on government the for notes produced firms rinting 54 i te ot rmtc tgs f yeifain are hyperinflation of stages dramatic most the in e ers at a time because the beer would grow warm and warmand grow would beer the because time a at ers

nted in April 1924 was based on based was 1924 April in nted issue of 10 billion gold marks of marks gold billion 10 of issue ny (ibid). The commission was commission The (ibid). ny ns of balancing the budget and and budget the balancing of ns rate fell from 275 marks to the the to marks 275 from fell rate downward by more than 10 10 than more by downward fifth, varying according to to according varying fifth, per day inflation, the price the inflation, day per be initially reduced and reduced initially be n Nw urny the currency, New on. ust, to 11.2 percent in in percent 11.2 to ust, ents would start at 1 1 at start would ents tion troops. Third, troops. tion Rentemark os remained ions nd Associated nd invited the invited of the trip. trip. the of per 1 per reports well well more more stale stale o CEU eTD Collection percent ratio to note and deposit liabilities (ibid). Finally (ibid). liabilities deposit and note to ratio percent Reichsmark wc aan ad usqety o Gra mncplte (Feis municipalities German see 26; Kindleberger below). 1986,22,fn. for subsequently and again, twice Stahl and Krupp for issues bond similar by up followed quickly was a Germany to lending foreign the sparkled loan Dawes the Morgan’s, stabiliza assist to France for million $100 and 1924 February p the aside set indebtedness, Germany's of amount the determine p reparations the of settlement satisfactory and thorough a for yearInGilbert, the Agent-General for report his Reparations. of onthird re solut final the for call The problem. reparations the to solution cons was plan the However, capital. foreign of inflow constant the of to a premium over the subscription price of 92 and at one time so time one at and 92 ofpricesubscription the over premium a to at subscription for offered coupon, 7% a bearing loan, the that high dol million 110 selling oversubscribed, heavily was It success. huge hea syndicate aby market U.S. the on floated loan Germanexternal German of collateral the against floated be to was million) foreign one-quarter gold, three-quarters reserves, maintain to required ital ipsil, ic te mrcn on woul loans reparations. American the since impossible, virtually 1924). agents Morgan though even scheme, final the accept again bankers, American from loans needed urgently whose Further Company, depended. Plan Dawes the which and upon Germany Morgan P. J. of representatives 37 worth only four new marks (Time, 25 June 1934).” 1934).” June 25 marks(Time, new four worthonly 42,000,000,000 worth was dollar a bed, to went they 36 However, Marks (1978, 248-9) observed that behind behind that observed 248-9) (1978, Marks However, the of president the Schacht, Dr. 1924, In 37 Under the Dawes Plan, Germany met her obligations almost in f in almost obligations her met Germany Plan, Dawes the Under lhuh hr wr ohr i frin on, .. 10 ilo la fr J for loan million $150 e.g. loans, foreign big other were there Although

(ibid, 27). (ibid, 36

Reichsbank

became independent of the German government and was was and government German the of independent became Reichsbank required provisions making future sanctions against sanctions future making provisions required ,000 old German marks. When they woke up, a dollar dollar a up, woke they When marks. German old ,000 55 etn fr wnyfv yas waee hpee t happened whatever years, twenty-five for extend d dependent upon Morgan approval. Thus France had to to had France Thus approval. Morgan upon dependent , performed what to Germans seemed a miracle. “When miracle. a seemed Germans to what performed , , the French franc had continued to decline, and Fr and decline, to continued had franc French the ,

mrmtr a esnil o as te ag la to loan large the raise to essential was imprimatur the scenes, decisive pressure was exerted by by exerted was pressure decisive scenes, the , a loan of 800 million marks ($200 marks million 800 of loan a , railroad securities (ibid, 22). The The 22). (ibid, securities railroad ion came from Seymour Parker Parker Seymour from came ion tion in March 1924 issued by by issued 1924 March in tion olm hc wud finally would which roblem ld over 95(over ld revailing transfer measures, transfer revailing ded by J. P. Morgan was a a Morgan was P. J. by ded 92 by the syndicate went syndicate the by 92 lars. The demand was so so was demand The lars. verein, Thyssen, Krupp Krupp Thyssen, verein, nd Latin America and America Latin nd ull, especially because especiallybecause ull, 1950, 42, cited in in cited 42, 1950, exchange, at a 40 40 a at exchange, idered a temporary temporary a idered parations, he called parations, he called Time , 27 October27 , apan in in apan default default ance was o o

CEU eTD Collection Thea defeat for the nationalists. ther However 251). (ibid, plan the opposing voters million 1929, 5.8 with attention, December 22 signi On gained Germany. Hitler in Adolf hostility which in raised Plan, Plan Young Young the The on referendum German the and Commission supervision. Reparations the supersede thus and reparations Bas in Settlements International for Bank a of establishment the pl The 250). 1978, (Marks distress monetary or economic of conditions under rem the payable, unconditionally was annuity each of marks millions for billion 2.5 of figure standard-year Dawes the below annuities Young D. Owen by chaired was 1928 autumn the in formed committee A spe committee. The plan Dawes the of member and a General Electric the calltook 249). (Marks evacuation of Rhineland 1978, (Bergm finances who and approached marks German billion 2.5 of payment Dawes whose Germany, of supervision Plan Dawes the abolish and able to reach agreement on a new reparations plan, in Septembe in plan, reparations new a on agreement reach to able Commi Experts’ Paris the of experts the that feared market privat a with 69) 1984, (James Co & Higginson Lee second of bank Boston the by led consortium the in and banks central other with cooperation the first in case in exchange twoforeign with runs: 1929 and had deal 1930,the to Reichsbank consumpt employment, in also fall dramatic a was There 2.1). Box o sources the on 1; 2001, Hornstein and (Fisher years five following the almost then and trend, to relative percent 30 than more by years G recession. the into sinking started world the meantime, decli output the German on, In 1928 From short-lived. was 1924 of stabilization the Reichstag ratified the Young ratified 1930. on12March Plan 56

ttee on reparations would not be not would reparations on ttee el to facilitate the payment of payment the facilitate to el fifty-nine years but only 660 660 only years but fifty-nine r 1930, money flowed out of out flowed money 1930, r completely recovered within within recovered completely ainder being postponable being ainder cified that Germany pay Germany that pay cified o ad netet In investment. and ion erman recovery after recovery erman , the referendum was referendum the , f the depression, see depression, the f e American loan loan American e n 13, 585). 1930, ann was interested in interested was . In spring 1929, spring In . an also involved involved also an Dawes foreign foreign Dawes ned within four within ned iat national ficant , the head of head the , ws a was e CEU eTD Collection policy playing an important role as well. However, they do not not do they However, well. as role important an playing policy payments imposed by the Versailles Treaty and international and Treaty Versailles the by imposed payments oiia ad cnmc es Bt ne hs sis ea tkn o wa on taking began ships those once But seas. economic and political pr in changes with decline, economic the for factor important most mar their above significantly were which wages, real the that resul Their given. as 1928 in conditions economic the take they although (2001), emphasized is wages real the of Importance inflows. capital surpl export accumulate not i left This abroad. borrow to forced was Instead, it reparations. did Germany this, of Because uncompetit markets. goods German made which costs, labor high were cause main bef conditions German the in lie depression the ofcauses the that Bor depression. German of causes the on debate ongoing an is There SourcesGreat 2.1: Box of Germany the in Depression year. for camethe final hit the reparations the following relief reparations the sought Germany crisis, 1930 the of result R the in well unexpectedly did party Nazi the after Germany xlntos sc a mntr plc, afntoig iaca sy financial malfunctioning policy, monetary as such explanations, the First World War and promised a safe haven for ships of sta of ships for haven safe a promised and War World First the s gold of mentality [the “It 2000): Temin and Eichengreen 1985; Sachs and l the cut to failure the in depression German the of cause major millstone around 2000,206).” (Eichengreenand their millstone necks Temin 57

trade. Alternative view sees the the sees view Alternative trade. t vulnerable to a sudden halt in in halt sudden a vulnerableto t also by Fisher and Hornstein Hornstein and Fisher by also eichstag elections (ibid). As a a As (ibid). elections eichstag (Marks 1978, 252). However, 252). 1978, (Marks e cern lvl, ee the were levels, clearing ket te buffeted by stormy social, stormy by buffeted te ore 1928. He argues that the that argues He 1928. ore ink with gold (Eichengreen gold with ink control for alternative alternative for control stem, the reparations reparations the stem, oductivity and fiscal fiscal and oductivity chardt (1991) argues argues (1991) chardt tandard] survived tandard] ss o finance to uses e, od a a was gold ter, v o world on ive ts suggest suggest ts CEU eTD Collection German crisis, see Box 2.2). Box German see crisis, sources the on (ibid, August 5 on only operations normal resumed and days li a for reopened which institutions, German all of closure forced general a to lead This 69). 1984, (James failed institution, financial National und Darmstädter- the 1931, July 13 On quickly. spread crisis 2001) Aguado (see 1931 March in announced project union customs Austro-German force to order in shilling Austrian the on run 1931 the exacerbated requirement credit their for it upon depended industries Austria’s 1934, 6). act This default immediately Allied theby formal loans (ib onwar followed and Dawes the were which of major the debt, market foreign its on payments all of suspension declared Germany 1934, June 14 on Finally, f loans their on defaulted had Finland except debtors European all J of LausanneConference the in dead declared were reparations (Kindleberg 1933 June and 1932 December in States United the to debts payinst to continued Britain themonths. following in decline to continued internat the of conditions the However, improve. conditions economic the once payme reparation the that belief a on based 252) 1978, (Marks nations pri of safety the insure to designed was measure The 1931. July in debt intergovernmental all on moratorium one-year a proposed Hoover 91 ad Aguado and 1991;

n re t da wt te nblt o Gray opy repara pay to Germany of inability the with deal to order In

In May 1931, Austria’s largest bank bank largest Austria’s 1931, May In

01. h fiue a o get motne eas aot two-thir about because importance great of was failure The 2001). Creditanstalt 58

declared bankruptcy (see Schubert Schubert (see bankruptcy declared uly 1932 (ibid). By mid-1933, mid-1933, By (ibid). 1932 uly s (Murad 1932, 176). France 176). 1932, (Murad s vate investments of creditor creditor of investments vate mited business after two two after business mited run on the banks and a a and banks the on run Austria to abandon the the abandon to Austria the Young bonds (Auld (Auld bonds Young the Herbert president tions, rom the United States. States. United the rom bank, a major German German major a bank, s, which was accepted accepted was which s, nts would be renewed renewed be would nts in foreign currencies currencies foreign in allments on the warthe on allments er 1986, 18). The The 18). 1986, er ional economy economy ional f h 1931 the of id). id). The . s of ds CEU eTD Collection problem of the 1931 crisis was foreign debt, to which the currency the which to debt, foreign was crisis 1931 the of problem heavil was and hyperinflation the since weak been had system banking a who (2003) Adalet and (2004) Schnabel by supported was perspective capita domestic through primarily deteriorated 1931 July in position especiall 1920s, late the in finance public German of problems rdt aiiis o ak ad uiess Acrig o ae, G James, to According businesses. and banks to facilities credit weretheendogenous. time arguably argue and views both challenge (2008) Sarferaz and Ritschl Finally, a precipitated Brüning by games policy foreign the and unhealthy syste banking the that argue who (2008), Temin and (2004) Temin and Ferguson cur The crisis. the avert to credit foreign available otherwise result which government, German the by statements foreign aggressive c the that argues (1991) Holtfrerich hand, other the On internationally. crisis 1931 July the links – (1979) Borschardt with line in – 1986) (1984, James the of sources the of overview an provide (2008) Sarferaz and Ritschl Sources German 2.2: Box of the 1931 crisis coupons maturing to December 1934 on bonds of the two issues which o which issues two the of bonds on 1934 December to maturing coupons sterling provide to agreed had Germany 4 July by However, it. from m sold which Dominions British the against retaliation a threatened collecti debt up set to authority discretionary a Parliament t of Chancellor British the default German the after days few tr ran States, United the of apart Allies, the All collection. Auld (1934) describes how the Allies used the clearing systems systems clearing the used Allies the how describes (1934) Auld 59

ade deficits with Germany. Only Only Germany. with deficits ade rency position was taken also by also taken was position rency n hog cerns Germany clearings. through on he Exchequer obtained from from obtained Exchequer he y Reichsbank’s curb of the the of curb Reichsbank’s y n avoidable currency crisis. crisis. currency avoidable n and banking problems at problems banking and ore to Germany than buy buy than Germany to ore to pay British holders of holders British pay to rays international ermany’s l flight. The banking banking The flight. l risis was triggered by by triggered was risis 1931 German crisis. German 1931 rgue that the German German the that rgue d n h rfsl of refusal the in ed ht h underlying the that n June 15 had been been had 15 June n to enforce debt debt enforce to y exposed exposed y m was not not was m o the to CEU eTD Collection by the European reconstruction based on the return to the gold standard,gold the to return the on based reconstruction European theby plan which would restore London as the financial centre. financial the as London restore would which plan New York. The return to the gold at the pre-war parity of $4.86 pe $4.86 of parity pre-war the at gold the to return The York. New started in 1924 and lasted to an abrupt halt in 1929. The United States States United The 1929. in halt abrupt an to lasted and 1924 in started States restored the foreign lending to Europe. restored lendingStates Europe. to the foreign the in accepted was this of Part settlements. debts war the undermine the credibility of Britain’s commitment to gold and drive and gold to commitment Britain’s of credibility the undermine British The option. an seem not did devaluation weaker, war the from rat what at was question The convertibility. gold domestic the of Private CapitalFlows 2.5 A to treatment werereparation and debt war flows renewed. not equal the of basis the tra on it export rejected German government the for concessions special obtain to desire S and government German The Germany. in investment American all questas the broad part of dealt the default with underlying Reich bonds, the the inter beinganot party to hand, the United States, agreements. On the other obtaine andFrance, Switzerland Holland holders 7). (ibid, the British ownershipin of rtn, nldn Jh Myad ens n Caclo o te xhqe W Exchequer the Uni the on of inflation forcing of possibility Chancellor the considered Churchill, and Keynes Maynard John including Britons, Be States. United the in inflation or Britain in deflation either 38 Chapter 3). 3). Chapter and period interwar the in problems monetary the of For a detailed account of the Anglo-American finan Anglo-American the of account detailed a For However, Great Britain had a different plan for the postwar f postwar the for plan different a had Britain Great However, The first post-War years saw only little foreign lending, i lending, foreign little only saw years post-War first The

the return to the gold standard is in Eichengreen Eichengreen in is standard gold the to return the cial rivalry in the 1920s, see Costigliola (1977). (1977). Costigliola see 1920s, the in rivalry cial 60

38 The key step was the resumption the was step key The 1924 Dawes Plan and the United the and Plan Dawes 1924 tween 1918 and 1925, some some 1925, and 1918 tween e. Although pound emerged emerged pound Although e. n contrast to the burst that that burst the to contrast n inancial reconstruction, a reconstruction, inancial ted States by paying the the paying by States ted international investors to investors international r pound therefore meant meant therefore pound r e Hwvr te U.S. the However, de. merican investors. The The investors. merican conditioned the lending lending the conditioned balanced budgets and budgets balanced erd ht t would it that feared hct xrse a expressed chacht ion ofion of the status national treaties d similar d similar The story story The inston (1996, (1996, CEU eTD Collection unique products (Wilkins 1970, 35, cited in Lipsey 1987, 9).1987, Lipsey in cited 35, 1970, (Wilkins products unique nationa with companies involved and War Civil the after began abroad The investment. direct than greater was investment portfolio when f of history U.S. the in period only the was This 110). 1989, (Eichengreen long-term of purchase the through percent 45 and investment, foreign the in percent 40 billion, $10 than more lent investors U.S. 1930, in ending p 75 than more 1897, in percent 90 than more was investment foreign the in m wasthe Singer, 1860s thelate by factory foreign the withdrew loans an during the onforeign war. placed embargo of end the At convertibility. gold the suspending act Parliament b months few 1925, April in standard gold the of adoption Britain’s the on based standard gold international the of threat the and dominions potenti The same. the do to about was Australia not. or so did Britain gol the adopt would it announced Africa South 1925, early In outside. the made unemployment Britain pushed that factor The gold. on return to reluctant rising Churchill, The competitive. price less exporters m 1996, currencies German (Eichengreen and Belgian 1920-21 French, in undervalued and percent pound Overvalued 11.3 to 2 from risen had unemployed as ins the of percentage The recessionary. was deflation the However, rate interest the raised England of Bank The deflation. through dollar gol much wa left absorb solution only The level. price the on could effect significant States United the that believed He unworkable. U the overfeeding of idea the found Niemeyer Otto counselor financial B However, 920-921). 1977, (Costigliola dollars than rather gold in debt war 39 The first American international business with sal with business international American first The The foreign lending was the most robust in the period of 1924-1929. In the the In 1924-1929. of period the in robust most the was lending foreign The

anufacturer of sewing machines (Wilkins 1970, 37-42 1970, machines(Wilkins sewingof anufacturer aried sales representatives abroad in the 1860s and 1860s the in abroad representatives sales aried 61

39 s to push up sterling against the against sterling up push to s The share of direct investment direct of share The efore the expiration of the the of expiration the efore ured labor force recorded recorded force labor ured back on gold came from from came gold on back U.S. direct investment investment direct U.S. s. Prices began to fall. to began Prices s. nited States with gold with States nited Britons, especially especially Britons, U.S. dollar led to the the to led dollar U.S. year, Great Britain Britain Great year, l leain f the of alienation al d standard whether standard d foreign securities securities foreign ercent in 1914 but but 1914 ercent in sls ln and plans sales l oreign lending, lending, oreign wtot any without d ritish Treasury ritish form of direct of form d British ade 11 years 11 the first the ). ). 58). 58). CEU eTD Collection portfolio investment was heavily directed toward Europe (Eicheng Europe toward directed heavily was investment portfolio y 95 fe a eis f eals n s te 90 ae n exce an are 1920s the so and defaults of series a after 1935 by period of the reversal in the capital flows. Whereas after wa after Whereas flows. capital the in reversal the of period bankers’ acceptances declined to less than 4 percen 4 than less to declined acceptances bankers’ those on domestic medium gradethose ondomestic medium bonds. corporat high-grade and securities government U.S. on those exceeded beca uses foreign and domestic between savings U.S. allocating Whereas most of the investment in Latin America took the form of form the took America Latin in investment the of most Whereas utilities saw the highestutilities 13.6% 1929. increase 1924to in in from 4.2% produc primary pu and the manufacturing production), to petroleum and predominantly mining (agriculture, went investment direct the 1929, and 1924 foreign lending. foreign lending. oetc od yedd ny . pret frin bo foreign percent, 5.5 attractive.” understandably only yielded bonds 192 through domestic 1923 from declined yields bond Domestic depre credit bank of expansion the with conjunction inv direct of primacy The 110). 1989, (Eichengreen 1930 in half than less highe by attracted were who bankers by Europe in placed loans, for dangerous more far the took funds of transfer the and attractive; c American appreciating rapidly as out, thinned supply of source inve American by securities European of purchase of form 40 c This Europe. from capital the withdrew States United The 1920s. l foreign the in changes first The 41). 1986, (Kindleberger highest lending foreign in growth the which during 1924-1929, of period the in billion $3.3 Eichengreen (1989, 116) observes that “[d]espite s “[d]espite that observes 116) (1989, Eichengreen ihnre (99 156 age ta rltv rts f eun pla return of rates relative that argues 115-6) (1989, Eichengreen egahcly ms o te edn ws ietd o uoe and Europe to directed was lending the of most Geographically, Overall, the United States loaned abroad some $6.4 billion and the Uni the and billion $6.4 some abroad loaned States United the Overall,

40

t, while call money rates fluctuated between 2 and and 2 between fluctuated rates money call while t, ssed the returns on domestic assets. After 1921 the 1921 After assets. domestic on returns the ssed terilization by the Federal Reserve, a steady gold gold steady a Reserve, Federal the by terilization 62 nds which might yield seven or eight percent were were percent eight or seven yield might which nds 8. In a period such as 1927-28 when medium-grade medium-grade when 1927-28 as such period a In 8.

r most of the capital flow took the took flow capital the of most r stors, by the late twentieth this this twentieth late the by stors, r interest rates (Landes 2003, 2003, (Landes rates interest r use yields on foreign bonds bonds foreign on yields use ommon stocks proved more more proved stocks ommon ptional episode in the U.S. U.S. the in episode ptional direct foreign investment, investment, foreign direct ame at the end of a longer longer a of end the at ame reen 1989, 115). Between 115). 1989, reen ending appeared in late late in appeared ending m of short-term or call or short-term of m e bonds, if not always not if bonds, e lc tlte. Public utilities. blic estment reappeared estment yed some role in in role some yed ai America. Latin ted Kingdom Kingdom ted was the was 5 percent. percent. 5 influx in in influx rate on on rate tion tion CEU eTD Collection percent between September and December 1929, recovered about hal about recovered 1929, December and September between percent again 1929(Landes 2003,371). in t plunged 1928, in dollars billion a over to 1926 in million $200 than less from U the from capital of exports net that so loans, European their b American 1929 early and 1928 late By 89). 1992, (Pollard Street Wall securitie home American in boom the when 1928, in case the be to out ea be could it that was flows money “hot” this of problem The 371). 1929 (ibid). C Great the until up held America Latin for issues new the and quarte third the in sharply dropped borrowing Canadian (ibid). issues a European, other German, for especially 1928, June after occurred fore in collapse The 54). 1986, (Kindleberger 1928 of half first the and 1927 of peaks new reached bonds foreign and stocks corporate of favor in down in anyin prior 1928(Klein March to month 2001,325). more – traded were shares million 70.8 nearly of total a 31, October Octob Wednesday, between sessions frantic eight the During 2.3). Box Long (de average 1929 September its below percent 77 and level Dec its below 66 percent 1932: summer of the in point a low again to fell and then Poor's composite index rose 64 percent between January 1928 and Septem and 1928 January between percent 64 rose index composite Poor's h US sok akt omd I md12, oetc oprt bns a turne had bonds corporate domestic mid-1927, In boomed. market stock U.S. The The Great Crash ended a period of the stock market boom. The nominal nominal The boom. market stock the of period a ended Crash Great The

63

nited States, which had risen had which States, nited and Schleifer 1991; see also see 1991; Schleifer and rash in the third quarter of of quarter third the in rash sily reversed. This turned turned This reversed. sily than had changed hands hands changed had than d sa ad Oceanian and Asian nd r of 1928 but recovered but 1928 of r fway to its 1929 peak, peak, 1929 its to fway s diverted all funds to to funds all diverted s in the fourth quarter quarter fourth the in er 23 and Thursday, and 23 er anks began calling calling began anks ber 1929, fell 33 fell 1929, ber o $200 million $200 o Standard and and Standard ember 1929 ember 1929 ign-lending d CEU eTD Collection ais n mna (e Glrih 98 Knlbre 17, oe 13) T 1938). Noyes 1978, Kindleberger 1988, Galbraith (See manias and panics prices collapsed and because the largest falls in output did not did output in falls largest the because and collapsed prices bubble. For a detailed literature review, see Klein (2001). (2001). bubble.a For detailedKlein review, see literature hypothesis the support studies Both 1991). Schleifer and Long (De funds or 1993) White and (Rappoport purchases stock fund to used investors which markets, s financial wider in behavior anomalous find to attempt which are there However, 1990). Long De and Barsky 1990, Dwyer and Santoni 1975, divi by measured fundamentals their with enough closely move markets ar there that claim which analyses, empirical by challenged marke the of behavior short-term on focusing explanations, Historical b market stock a was there whether on debate ongoing an is There market Stock 2.3: 1929? bubbleBox in cause the Great Depression is based on the fact that the real the that fact the on based is Depression Great the cause ina the for argument main The debated. is two the between link the future income which led consumers to forgo purchases of durable goods (see also Boxgoodsconsumersfuture of also (see forgo durable to led incomepurchases which generated 1929 October in prices stock of collapse the events: be link “uncertainty” an suggests (1990) Romer spending. and confidence the and crash the between link the suggest 1990) Romer 1976, (Temin authors Fisc and Dornbusch (see 1931 of panics banking the after later, The Great Crash is often marked as the beginning of the Great the of beginning the as marked often is Crash Great The

64

e no persistent bubbles and stock and bubbles persistent no e output started down before stock stock before down started output occur until nearly two years two nearly until occur temporary uncertainty about uncertainty temporary her 1984). However, some some However, 1984). her bility of the Great Crash to to Crash Great the of bility t, emphasize the role of role the emphasize t, such as brokers’ loans, loans, brokers’ as such bl i 12 o not. or 1929 in ubble Depression, however, Depression, dends (see Sirkin Sirkin (see dends that there was a was there that tween the two two the tween i ve was view his closed-end consumer consumer 2.4). tudies tudies CEU eTD Collection 2.1. Box the arena. hegemon See the international in also w Depression Great the that argues (1973) Kindleberger Finally, the of problems inherent the to Depression Great the of causes Temi and Eichengreen 1963). Rothbard (see 1920s the in System Reserve eas the by caused was Depression Great the that argues school contr the On 1930. June of Act Smoot-Hawley the of aspect international this extends (1976) Meltzer contraction. money the to led which System, in Depression Great the of cause main the see (1993) Schwartz the Fr 31-83). of 1976, overview Temin an see hypothesis, For spending 323. the of 1936, studies 196; econometric 194, 2, vol. 1930, Keynes (see spending in autonomous the around revolve explanations keynesian The money. vs. spending i.e. m vs. keynesian along organized mostly is debate the and explanations There Depression. Great the of causes the on consensus no is There Causes 2.4: ofBox the Great Depression tes n ul Cnd, retn, aaa Cb ad Czechoslovakia and Cuba Panama, Argentina, Canada, full: in others b issues their of some on Pola defaulted 1934. countries in Several 1937. loans in Young defaulted and Dawes the on defaulted and 1933 in bonds dollar on suspe then and reduced Germany Rumania. and Yugoslavia Greece, Hungary, of wave count agricultural A through spread rapidly and 1932 in started 1933. defaults in Cuba and Panama and 1932 in throughout Salvador Rica El and Costa Uruguay and Colombia Brazil, Chile, Peru, by followed 1931, it on service suspended Bolivia America. Latin in occurred defaults The Great Depression led to a number of defaults (see Mintz Mintz (see defaults of number a to led Depression Great The 65

y credit policies of the Federal Federal the of policies credit y policy of the Federal Reserve Federal the of policy as caused by the absence of of absence the by caused as gold standard of the 1920s. the of standard gold s dollar bonds in January January in bonds dollar s ries of Eastern Europe – – Europe Eastern of ries are several competing competing several are onetarist explanations, onetarist 1951, 30-1). The first The 30-1). 1951, explanation by an by explanation n (2000) link the link (2000) n ary, the Austrian Austrian the ary, ut maintained on on maintained ut nded payments payments nded . Altogether, Altogether, . iedman and and iedman European European h year, the decline nd nd CEU eTD Collection borrowers. Thus, whereas in the 1920s a borrower had to seek out a banker a out seek to had borrower a 1920s the in whereas Thus, borrowers. t correspond buyers the where market, sellers’ a to buyers’ 1930s the in defaulted who borrowers to went percent 18 only 1920-24, of period al Of 1928. of issues the of percent 63 to 1920 of issues the of percent borrower seeking the lender. They also cut their le their cut also They lender. the seeking borrower decadethe(Eichengreen1989, 137). course Depression of the Americby held securitiesforeign of approximatelytwo-third uig h 12s Frhroe se rus ht h frin edn marke lending foreign the that argues she Furthermore, 1920s. the during absence complete the was cautious less be to investors leading mos the that argues Mintz percent. 50 as high as is ratio the 1925-29 ped te rcs ws eesd n h lt 12s wee e Yor New representativecapitals search foreign willing to borrow. to for to those where 1920s, late the in reversed was process the spread, overcome be to had public the and banker the of resistance the and in defaulted who borrowers to went that issues of percentage The subsequent that proportion the by (measured issues foreign new of the indebted in responsive conditions current economic to countries. littl but default, of probability the about information conveying reputa of basis the on borrowers potential among discriminated some provide results His borrowers. among adequately discriminate 41 were the second and the third lowest of the group i group the of lowest third the and second werethe The two exceptions were J.P. Morgan and Co. And Ku And Co. and Morgan J.P. were exceptions two The Mintz (1951) argues that the major cause of the defaults was the was defaults the of cause major the that argues (1951) Mintz Eichengreen (1989) investigates the hypothesis that borrowers in in borrowers that hypothesis the investigates (1989) Eichengreen

nvestigated by Mintz (1951, 68). (1951, by Mintz nvestigated nding in the second half of the period. Their defau Their period. the of half second the in nding 66

hn, Loeb and Co., who followed the tradition of the of tradition the followed who Co., and Loeb hn, o the lenders and the sellers to the to sellers the and lenders the o an investors fell into default overdefault into fell investors an of defaults on foreign bonds bonds foreign on defaults of eiec ta te were they that evidence e in n pltcl factors political and tion ly defaulted) in 1920-30. in defaulted) ly by high yields and large large and yields high by 1930s increased from 6 6 from increased 1930s t important single factor factor single important t 41

evidence that lenders lenders that evidence k bankers sent their their sent bankers k quality deteriorating l loans issues in the in issues loans l the 1920s failed to failed 1920s the t changed from a a from changed t willing to lend, lend, to willing while for for while lt indexes indexes lt

CEU eTD Collection Policy Response 2.6 and Poland) sheltered behind tradeand Poland) shelteredbarriers (Eichengreen 1992,258). behind Belg Netherlands, the States, United (the countries standard gold (3) be isolated countries European Central (2) Britain; with mostly sterling (1) into fragmented was economy international the result, Belgium Britain, Great in also applied were flight capital for on Restrictions countries. American Latin in balances” “blocked investment borders instituti within exchange was confinementforcible foreign of foreign of repression and markets goods many in conditions t to leading way this countries, European Eastern and Central other clear bilateral and currencies” “blocked of systems complex Austria Germany, 1997). Taylor and Obstfeld (see controls exchange countr numerous 1931, the of runs currency the to response In varied. was 1931 President Roosevelt abandoned the goldmidwayPresident abandoned Roosevelt standard the through the proceedings. tur currencies of stabilization and trade international of revival the tackling at aimed 1933 of Conference Economic London the Similarly, meeti regular the join not did System Reserve Federal the debts, a reparations between links drew that action any opposed Congress rep the for responsible was it Since problems. reparations b central facilitate not could Settlements International for Bank resul the was This solutions. unilateral on mostly relied states The policy response to the Great Depression and the International the and Depression Great the to response policy The hs ised f h itrainl oprto ad jit prah o t to approach joint a and cooperation international the of instead Thus, 67

, France, Japan and Australia. As a a As Australia. and Japan France, , ings, which were later joined by by joined later were which ings, arations transfer and the U.S. U.S. the and transfer arations ank cooperation because of the becauseof cooperation ank t of several factors. First, the the First, factors. several of t ned out to be a failure, when failure, a be to out ned hind exchange controls; and and controls; exchange hind ngs of the B.I.S. (ibid, 259). (ibid, B.I.S. the of ngs he return of virtual barter virtual of return he eign exchange to prevent prevent to exchange eign nd the repayment of war war of repayment the nd ium, France, Switzerland Switzerland France, ium, onalized in the system of onalized of the system in and Hungary developed developed Hungary and ra onre trading countries area global depression, depression, global Financial Crisis of Crisis Financial (ibid, 19). The The 19). (ibid, e problem, he

ies raised raised ies CEU eTD Collection prices rose over 40% from March to may 1933, commodity prices soa prices commodity 1933, may to March from 40% over rose prices P inauguration, the after day second The depositors. panicstricken position of a net debtor, aside from U.S. government holdings of official of holdings government U.S. from aside debtor, net a of position products in foreign markets, translated into several influencingpolicies products foreign in translated several markets, into the spreads shrank (ibid). spreads (ibid). shrank respons In 9). 2009, (Romer closed permanently were banks U.S. of 10% than “stre bank to (similar book-checking of days four the that After survive. banks those reopen and reorganize and banks insolvent down close to four- mandatorya instituted which Congress of session special tts tef xeine a ae f ak alrs olwd b followed failures bank of wave a experienced itself States two decades of being a net creditor on private account, the United the account, private on creditor net a being of decades two abroad investment portfolio especially and direct U.S. hand, other (Lipse quadrupled than more solely investment short-term and doubled t in investment private Foreign activity. economic of level low the 21).

neet n h aoiin f h itra trfs wih ol ena would which tariffs, interwar the of abolition the in interest bas non-interventionism order economic the international post-war from the plan away deliberately turned States United The II. War defense of the United States (Lend Lease Act, 11 March 1941). In ret In 1941). March 11 Act, Lease (Lend States United the of defense Pres the defense whose country any of government the for article or lend, lease, exchange, to, title transfer sell, to President

Between 1935 and 1940, the United States was a destination of flight c flight of destination a was States United the 1940, and 1935 Between h psto o te ntd tts s ceio ws re-establ was creditor a as States United the of position The international the weakened instability financial the Finally, First, the Lend-Lease program was launched in 1941. The Lend-LeasThe 1941. in launched was program Lend-Lease the First, 68

otherwise dispose of any defense defense any of dispose otherwise day bank holiday. The aim was was aim The holiday. bank day y a wave of withdrawals by by withdrawals of wave a y d n h lbrl da. Its ideas. liberal the on ed States slipped back into the into back slipped States he United States more than more States United he resident Roosevelt called a a called Roosevelt resident ble the placement of U.S. U.S. of placement the ble declined. As a result, after result, a As declined. ident deemed vital to the the to vital deemed ident ss tests” of 2009), more more 2009), of tests” ss urn for, mostly military, military, mostly for, urn ished during the World World the during ished cnm. h United The economy. red, and interest-rate and red, reserve assets (ibid, (ibid, assets reserve y 1987 19). On the the On 19). 1987 y flows of capital. e Act allowed the the allowed Act e and started to to started and apital despite apital were able to to able were e, real stock stock real e, CEU eTD Collection proposed to the U.S. Congress by president Roosevelt in June 1943. The a The 1943. June in Roosevelt president by Congress U.S. the to proposed Administrat Rehabilitation and Relief Nations United The programs. ilo rvre edlae. oe 6 ilo o sur of billion $6 Some lend-lease). reverse billion 43 413). 1993, (Kindleberger 1930s the of wi participate w the after system to trading world multilateral a constructing agreed aid of recipients services, and goods Long 14). Eichengreen and other and (De 1991, programs and relief to year a dollars billion 4 about contributed States tw first the in Overall, others. the as right voting same the having a being of grounds the on contribution However, third the in 417). part take to refused 1993, (Kindleberger contribution second the of 12% and billion $2.6 consist that contribution first the of 72% furnished States United su civilian and military of stocks surplus with equipped was It Ax from liberated areas in diseases and starvation prevent to generous,quite cancelled. parts large with of debt sett The Commonwealth. the and Britain Great from came billion $6.8 totaled U.S. the to went that lend-lease Reverse China. to billion $1.6 billion $3.2 Union, Soviet the to billion $11.3 Britain, to billion $31.4 shipped: 42 The remaining $20 billion was cancelled (all data f data (all cancelled was billion remaining$20 The tota This million. $118 for cancel, not did Britain cha full A million. $532 for sold were transferred, 413).” 1993, (Kindleberger, 1941 August Charter, Atlantic the in Churchill Winston Minister For example, in Great Britain, the net amount of d of amount net the Britain, Great in example, For a has lines these along principles broad of set “A h US spot o wr fot ws copne b te reli the by accompanied was efforts war for support U.S. The

42 l of $650 million was financed by a 2-percent fifty 2-percent a by financed was million $650 of l rom Kindleberger 1993, 413). 413). 1993, Kindleberger rom rge was made for prime peacetime goods in the pipel the in goods peacetime prime for made was rge ttl f 5. blin ot o sple were supplies of worth billion $50.1 of total A signed on a battleship in Placentia bay in Newfoun in bay Placentia in battleship a on signed ls rpry n rti, n ln-es gos not goods lend-lease and Britain, in property plus ebt was approximately $26 billion ($30 billion minu billion ($30 billion $26 approximately was ebt 69 ray en cetd y rsdn Roeet n pri and Roosevelt President by accepted been lready

43

ar, different from the bilateralism the from different ar, is powers after the World War II. War World the after powers is reconstruction through UNRRA through reconstruction pplies already in existence. The The existence. in already pplies ed of goods with a value of value a with goods of ed o post-war years the United the years post-war o h h Uie Sae in States United the th lement of the debt was was debt the of lement major contributor but but contributor major $7.8 billion, of which of billion, $7.8 f n rehabilitation and ef ion (UNRRA) was was (UNRRA) ion gency was created created was gency to France and and France to -year credit. credit. -year dland in in dland ine that that ine s $4 $4 s me yet it it CEU eTD Collection on ws vraud Gra mr ad rnh rn wr udraud A a As undervalued. were franc French and mark German overvalued, was pound preventedGreat Depression. the by rbes Te ae Pa iiitd h lnig o emn, whic Germany, to lending the initiated Plan Dawes The problems. c and credit the Politically, factors. economic the and political trig a teeoe uhd p gis te olr hog defl through dollar the against up pushed therefore was sterling a gold to return to decided – center financial as London restore to Howev weaker. War the from emerged pound British The rates. exchange ret countries industrial major that was problem The adjustment. smoot the prevented that flaws serious had standard gold interwar The priv the in recovery The 1929. of Crash Great the with halt abrupt was broug short and was lending foreign of outburst However,favored the the Empire. Lat and Europe to mostly lent York New Geographically, standard. after 1925 in loans foreign on placed embargo an withdrew British larges the to lender prewar largest third the from Germany Conclusion 2.7 foreign lending was limited until 1924, when the Dawes Plan attempt Plan Dawes the when 1924, until limited was lending foreign repara the and debts war the around revolving tensions political the were period interwar the in credit of flows The creditor. net the econom U.S. the transformed it time, same the At world. the of rest E other and Britain Great capacityof the I War diminished World p and economic existing the in changes significant by marked was The interwar period provides only limited insight into the current the into insight limited only provides period interwar The The period between the beginning of the World War I and the end of t of end the Iand War World the of beginning the between period The 70

t debtor throughout the 1920s. 1920s. the throughout debtor t apital flows were influenced by by influenced were flows apital urned to gold at misaligned misaligned at gold to urned the credit to uropeanpowers to. u wees British whereas But ation. in America, while London while America, in tions. As a result, the U.S. U.S. the result, a As tions. t the pre-War parity. The The parity. pre-War the t influenced by both the the both by influenced y from the net debtor to to debtor net the from y ate foreign lending was was lending foreign ate ed to fix the reparations the fix to ed olitical structures. The The structures. olitical h balance of payments of balance h the return to the gold gold the to return the so transformed soon h er, Britain – willing – Britain er, global imbalances. imbalances. global he World War II War World he ht to an an to ht result, CEU eTD Collection protect domestic producers from foreign competition. As a resul a As competition. foreign from producers domestic protect deficits.Britain run empire and to current account its tended s account current run to tended States United the and France Germany, II. War the World and repressed was investment foreign The countries. standard gold (3) (2) area, sterling (1) blocs: trading the into fragmented was countries relied on foreign exchange restrictions to prevent capita prevent to restrictions exchange foreign on relied countries n epne o h Itrainl iaca Cii o 13 ad h Grea the and 1931 of Crisis Financial International the to response In

71

Central European countries, and and countries, European Central t, the international economy international the t, l flight and trade barriers to to barriers trade and flight l recovered only after after only recovered rlss whereas urpluses, Depression, t CEU eTD Collection e” Te .. olr a pge t gl a te ae 3 pr uc o g of ounce per $35 rate the at gold to pegged was dollar U.S. The peg”. planning for the postwar financial reconstruction culminated at the at culminated reconstruction financial postwar the for planning

3.1 Political and Background Economic 3.1 ae f “udmna dsqiiru, wih a lf udfnd Gover undefined. left was which disequilibrium,” “fundamental a of face r exchange pegged The dollar. U.S. the to pegged were currencies t of form the in compromise a brought 1944 July in signed Fund Agreem Monetary of Articles the and Statement Joint The rates. exchange domestic autonomous the of importance the stressed plan Keynes the insti international the by superintended stability rate exchange Whit U.S. Whereas arrangement. monetary post-war the of aspects which trilemma, to solution f the for opted still negotiators defaults 1930s the of experience disastrous The int capital. the into translate not did liberalism the However, alliances. into develop and 1930s the of nationalism economic the renew could that esta prevent to aimed which trade, liberalized the on rested order Ju in Hampshire New Woods, Bretton at held Conference Financial and T Allies. the among negotiated was system monetary international 44 rates, independent monetary policy and restrictions oncapital flows. rates, and policy restrictions monetary independent For a detailed overview of the Bretton Woods syste Woods Bretton overview the of detailed a For CHAPTERGLOBAL– 3 IMBALANCESUNDER THE BRETTON In contrast to the gold standard, which emerged informally, the Bretton Bretton the informally, emerged which standard, gold the to contrast In The rivaling plans of John Maynard Keynes and Harry Dexter White Dexter Harry and Keynes Maynard John of plans rivaling The WOODSSYSTEM, 1945-1970

m, see Eichengreen (1996, chapter four). four). chapter (1996, Eichengreen m, see 72

de factode tution and the capital mobility, mobility, capital the and tution rested on the fixed-exchange the on rested blishment of trading blocks blocks trading of blishment ates were adjustable in the in adjustable were ates he two-and-a-half years of years two-and-a-half he resh in the memory, the the memory, the in resh Monetary Nations United rainly re lw of flow free ernationally 44 n o te International the of ent e’s plan focused on the the on focused plan e’s

policy and flexible flexible and policy political or military military or political ly 1944. The new new The 1944. ly stressed different stressed he “adjustable “adjustable he old and other other and old mns were nments Woods CEU eTD Collection period until private investors would resume the practice of buyi of practice the resume would investors private until period t of rest the outgrew States United The 26). 1990, (Cox gold world’s the a surpluses food its of most GNP, world’s the of half over controlled q the to commensurate subscription a pay to obliged su was (IBRD) Development and Reconstruction for bank International institutions new Two controlled. were flows capital International paym of balance their to shocks temporary stabilize to supposed quota. quota. curr foreign borrow to able was it deficit, account system. to and disequilibria balance-of-payments experiencing countries p to established was (IMF) Fund Monetary International governments. trade deficit against the United States.United the against deficit trade r a as shortage dollar the by dwarfed soon were rights drawing 45 U.S. Financial Aid 3.2 suchgovernments as Greek Plan. theand or the aid Marshall to pro-U.S. Turkish through dollars of outflow the encouraged deliberately States United scra the avoid to order In (ibid). 1947 1, June of as Bank the by held funds one-t than more to commitment a was France to loan first The 105). 1973, Asher (Mason could and be Bank lending used of share for U.S. 1947, only $571.5million the f Europe help to capital enoughhave not did IBRD reconstruction.The shortage dollar The deficits. payments of balance European with ebr o te M wr asge qoa, hc ref which quotas, assigned were IMF the of Members However, the Bretton Woods did not work quite as expected. The modest quotas modest The expected. as quite work not did Woods Bretton the However, h Uie Sae eegd rm h Scn Wrd a a a hege a as War World Second the from emerged States United The

45 It was clear that the quotas were insufficient to deal to insufficient were quotas the that clear was It ency from this fund in amounts determined by the si the by determined amounts in fund this from ency uota. If the Fund member short of reserves ran a cu a ran reserves of short member Fund the If uota. 73

etd hi rltv eooi pwr Mmes were Members power. economic relative their lected hampered also the postwar the also hampered ng the securities of foreign foreign of securities the ng sl o Wsen European Western of esult ents by domestic policy. policy. domestic by ents nd it stockpiled 80% of 80% stockpiled it nd manage the monetary monetary the manage were established. The The established. were rom the slump. In May slump. the rom various aid programs, aid various rovide liquidity to the to liquidity rovide pposed to bridge the bridge to pposed he world in terms of terms in world he hird of the loanable loanable the of hird mble for gold, the gold, for mble mon. In 1945, it it 1945, In mon. ze of the the of ze and rrent rrent CEU eTD Collection permanently more than double of the next largest economy. In 1950, it w it 1950, In economy. largest next the of double than more permanently peopl onfree imposed totalitarian that regimes recognition frank than a r totalitarian them upon impose to their seek that and movements aggressive institutions free their maintain to peoples free help however objectives, our realize not shall We (…) coercion. from free w to able be will nations other and we which in conditions of creation economy. economy. isola was it since consideration, into bloc Eastern t or position external U.S. the on influence an had 47 U.S. of size the Bretton-Woods, the of breakdown the until I War World the and income capita per economy, its of size aggregate the Union, with its huge natural resources, large population and armie and population large resources, natural huge its with Union, cha potential only The 26). 1990, (Cox unchallengeable were force air Paci the across China from stretched bases military of network de to means the and bomb atomic the controlled alone It militarily. 46 out to be a significant element in the U.S. endorsement of its role as a hegemon. role be of endorsement the to U.S. as a in its out a significant element hegemon. aietto o te hne n h US frin oiy rm non-interve from policy foreign U.S. internationalism. the in change the of manifestation 1990, 36-7). 1990, 36-7). (W aircraft commercial and transport world's the of 75% about and world's the of 70% owned Americans while steel world's the of 50% f blast US 1940s, late the In 334). 1974, (Krasner British the than higher share its and higher 1.78 was capita per income its economy, Soviet On Truman Doctrine and the wider problematic of co of problematic wider the and Doctrine OnTruman in taken is Union Soviet the dissertation, this In h sec o te rsdn Tua t Cnrs o 1 Mrh 97 a a was 1947 March 12 on Congress to Truman president the of speech The n diin o h eooi dmnne te ntd tts a dmnn a dominant was States United the dominance, economic the to addition In 47 Oe f h piay betvs f h frin oiy” e sai he policy,” foreign the of objectives primary the of “One

to account only indirectly, through its impact on p on impact its through indirectly, only account to he global capital flows. Otherwise, I abstract from abstract I Otherwise, flows. capital global he e ad i nt infcnl priiae n h in the in participate significantly not did and ted 74 ntainment, see for example Kissinger (1994). (1994). Kissinger example for see ntainment,

share of world trade. Since the Since trade. world of share fic to Europe and its navy and navy its and Europe to fic ainl nert against integrity national s. egimes. This is no more no is This egimes. to willing are we unless , 46 of the world trade 1.44 trade world the of hite 1982, cited in Cox in cited 1982, hite liver it, its world-wide world-wide its it, liver merchant marine fleet fleet marine merchant es, by direct or indirect indirect by or direct es, This challenge turned challenge This llenger was the Soviet Soviet the was llenger ork out a way of life of way a out ork as 3.15 size of the of size 3.15 as urnaces produced urnaces economy was was economy toim to ntionism olitics which which olitics , i the “is d, taking the the taking ternational ternational clear lso CEU eTD Collection between 1938 and 1947 (Price 1955, 29). There was a shortage of basic mater basic of shortage a was There 29). 1955, (Price 1947 and 1938 between worl prosperous most the once Europe, put to insufficient be to proved oiy wih a a rfud fet n h cptl lw truh h E the through flows capital the on effect profound a had which policy, United States.” the hence and peace international of foundations the undermine aggression, another $100 million to Turkey. Turkey. to another $100million was aid economic and military in million $300 Therefore, democratic. mo are countries developing orderly whereas control, communist the regions poor that i.e. want,” and misery by nurtured are regimes was assumption underlying The processes.” political orderly and es is which aid financial and economic through “primarily come announced b Truman region. easternMediterranean had of security underwritethe Britain Great after aggression, communist resist to moreIn than ofpregrew halflittle coal coal. of the production at 1947,German 48 output industrial U.S. the whereas Netherlands, and France in levels Greec and Italy, Austria, in level 1938 the of two-thirds reached pr the of percent 27 only was Germany of output industrial 1947, early eortc onre. h plc o cnanet on rnltd int translated soon containment of policy The countries. democratic was world the of peace the ensuring in leadership U.S. The communism. policy the defined effectively Doctrine Truman the time, single Program,Marshall known Plan. as the Eichengreen and Uzan (1992). (1992). Uzan and Eichengreen On Marshall Plan, see Mee (1984), Price (1955) or or (1955) Price (1984), Mee see Plan, Marshall On The primary goal of the speech was to render all necessary ai necessary all render to was speech the of goal primary The The thoughts for the Marshall Plan emerged as the help provided provided help the as emerged Plan Marshall the for thoughts The lhuh rmn i nt eto teSve Uin r omns nhs peh a speech his in communism or Union Soviet the mention not did Truman Although

48

75 a recent rethinking of the impact of the Marshall P Marshall the of impact the of rethinking recent a

that the “seeds of totalitarian of “seeds the that of containment of aggressive of containment of sential to economic stability economic to sential are more prone to fall under fall to prone more are elieved that the help should help the that elieved e, and was below prewar prewar below was and e, had more than doubled than more had d to Greece and Turkey Turkey and Greece to d o a concrete economic economic concrete a o granted to Greece and Greece to granted d region, on its feet. In feet. its on region, d ewar volume, had not had volume, ewar it could no longer longer no could it re prone to remain remain to prone re extended to all the all to extended rpa Recovery uropean hog UNRRA through euiy f the of security ials, especially especially ials, -World War II War -World lan by by lan

CEU eTD Collection barter. Thousands of city dwellers traveled to the countryside to to countryside –clothes, crockery lamps, possessions eggs and– for potatoes 1991,121). (Kindleberger the to traveled dwellers city of Thousands barter. pace, Dutch and Belgian production was 20 percent below and British 10 British and below percent 20 was production Belgian and Dutch pace, ald Pie 95 3) Fres hrfr hadd hi crops their hoarded therefore Farmers 31). 1955, (Price failed the arrest to attempt government’s the as 1947, of half second the inflat and 1946 in percent 80 for rose France in prices wholesale the products example, their market to willing not were Farmers 18). (De 1947 in harvest disastrous a in resulted winter fierce a with fertilize of lack The food. of shortage general a was There 29-30). betw percent 8 approximately by grown had population the whereas a n mas f bann te ad urny Dla sotg hampered shortage Dollar currency. reconstruction. hard the obtaining of means no had de running trade was Europe diminished. the savings and exchange depleted reserves liquida less or more were assets Europe’s World, New the from the dismal returns on investments in Europe after World War I a I War World after Europe in investments on returns dismal the Europe to willing loan capital to bec were bankers U.S. not (Block 82). Since the 1977, a billion $20 of rate annual an reached billion $6.5 of surplus export 1946 peace to war from transformation smooth a enabled demand foreign reces the from States the pulled finally that production war the

coal-burning and electricity using industry was shutdown in February 1947 (ibi February in 1947 coal-burning using shutdown electricity was industry and a heating to diverted was uses industrial for coal The 1946-47. of winter accentu was coal of lack The 17). 1991, Eichengreen and Long (De levels Finally, there was a problem of payments. Although all of the of all Although payments. of problem a was there Finally, However, economically strong Europe was in the interest of the of interest the in was Europe strong economically However, Agricultural yields in most areas were not yet up to 80 perce 80 to up yet not were areas most in yields Agricultural 76

ted during the war; its foreign its war; the during ted Long and Eichengreen 1991, 1991, Eichengreen and Long o hm cnupin and consumption home for rs and machinery combined combined machinery and rs nd the communist electoral communist the nd sion. Strong domestic and and domestic Strong sion. upward inflationary spiral spiral inflationary upward een 1937 and 1947 (ibid, (ibid, 1947 and 1937 een above could be obtained obtained be could above by further 50 percent in in percent 50 further by ionary currencies. For For currencies. ionary nt of the prewar level, level, prewar the of nt rd ter household their trade production. The U.S. U.S. The production. nd a fifth of Britain’s Britain’s of fifth a nd United States. It was was It States. United ated during the cold the during ated percent below 1938 below percent year by mid-1947 mid-1947 by year d, 18). h postwar the ficits and and ficits ause of of ause

CEU eTD Collection buy U.S. exports at the 1946-47 rate beyond another 12-18 months,” which woul which months,” 12-18 another beyond rate 1946-47 the at exports U.S. buy public by U.S. Secretary of State, General George Marshall George General State, of Secretary U.S. by public growtheconomic employment. and thi and products U.S. import to Europe for difficult very been have wer aid the and reserves exchange foreign the Once 82). 1977, Block 9; 1991, Long (De reserves exchange foreign European and UNRRA the through gove U.S. by mostly financed was surplus exports U.S. the strength, major U.S. aid program to finance a continued high level of U.S. export U.S. of level high continued a finance to program aid U.S. major Commit The 82). 1977, (Block employment and activity business effect a be not will world “the that concluded who Committee, Coordinating War 1947. 49 in effective least was conditionality American the that argue Eichen ineffectual. was it argue (1991) Wall or (1985) Esposito as c of importance the accept (1972) Arkes and (1955) Price Whereas to proved conditionality this whether debate a is There economies. lib for also pushed States United the integration, economic to addition “a joint one, agreed to by a number, if not all European nations (Marshall Speech, 1947 Speech, European (Marshall all nations not a number, if by to “a one, agreed joint E read from come to initiative the was expected it but recovery States European United The unconditionally. offered not was aid the immediate an them by providing communism of lure the fromaway to meant was aid The stability. political the for necessary beli the especially Doctrine, Truman the of elements certain For the contribution of the Marshall Plan to Europ to Plan theMarshall of thecontribution For This was recognized in early 1947 by American planners in a hig a in planners American by 1947 early in recognized was This oig es hn mnh atr rmns peh Mrhl’ s Marshall’s speech, Truman’s after months 3 than less Coming

ean integration, see for example Dinan (2005). (2005). Dinan example for see integration, ean 77

draw the suffering Western Europe Europe Western suffering the draw ef that the economic prosperity is prosperity economic the that ef at Harvard University on 5 June 5 on University Harvard at fiscally strong, large economies, economies, large strong, fiscally urope and the program to be to program the and urope green and Uzan (1992, 47) 47) (1992, Uzan and green onditionality, others, such such others, onditionality, economic help. However, help. economic s way support the U.S. U.S. the support way s eralization of European of eralization rnment aid channeled channeled aid rnment be successful or not. not. or successful be was introduced to the to introducedwas h-level State-Navy- h-level y to contribute to to contribute to y ec emphasized peech e Pooa o a of Proposal tee ble to continue to to continue to ble and Eichengreen Eichengreen and e gone, it would gone,it e d seriously d ).” 49 In CEU eTD Collection program, which dated from April 1948, when the Foreign Assistance Act Assistance Foreign the when 1948, April from dated which program, basement of the Pentagon, and we joked that for yea for that wejoked and Pentagon, the of basement o was It made. were corrections or available became 5.2 $ of figure a on settled early We information. clean completely come cannot one that is Congress, Long (Eichengreen De “controls” and 1991). and Eichengreen the 1992; Uzan mix in “ more with economies” “mixed of a direction in economy European political of liberalization the and stability financial of restoration the State United the Nevertheless, Kingdom. United the or France as such was greatly reduced by the shock of the bloodless communist communist bloodless the of shock the by reduced greatly was t to opposition The 1991). (Kindleberger away feet 20 drowning man a to Ar Senator aid. did it saying of by this of disposed Committee, the of chairman amount the cut to trying kept Taft, A. Robert of representative prominent most The isolationists. the from opposition coming sharp met plan the sum, this cut Truman Although Washington. 1952, when the last payment was made (Ferguson 2009,307). was1952, when made the payment last (Ferguson 50 over spread percent 1.1 or speech, Marshall’s of year the in GNP roughl to equivalent was Plan Marshall the under disbursed amount total We to aid worth billion $13 transferred States United the 1951, and 1948 E of devaluation percent 30 the and plan Marshall the of provisions under m the after only disappeared shortage dollar the and deficits trade t of most created and years postwar first the in transactions initia granting bill a passed Congress after, Soon 1948. February in the answer always came out $ 5.2 billions.” billions.” 5.2 $ out came always theanswer the and followed that year fiscal the for and 1948, (Kindleberger 1991, 123) observed that “[o]ne of t of “[o]ne that observed 123) 1991, (Kindleberger uoen eosrcin rpsl sig o $2 ilo i ad was aid in billion $22 for asking proposal reconstruction European oenett-oenet iaca ad oiae te nentoa fina international the dominated aid financial Government-to-government

billions for the first fifteen months, from April 1 April from months, fifteen first the for billions rs thereafter whenever these machines were asked a a wereasked machines these whenever thereafter rs efe wr ual t cag i, o atr ht ne what matter no it, change to unable were reafter ne of the first uses of computers known to me, thos me, to known computers of uses first the of ne and confess to slips and errors, or adjust changes adjust or errors, and slips to confess and he difficulties of working for a political constitu political a for working of difficulties he 78

production and prices and pushed pushed and prices and production he liquidity in Europe. European Europe. in liquidity he no good to throw a 15-foot rope rope 15-foot a throw to good no coup d’étatcoup h woe eid f the of period whole the sie .. iaca aid financial U.S. assive $ billion. $5 l s managed to facilitate facilitate to managed s thur Vandenberg, the the Vandenberg, thur this group, Senator Senator group, this y 5.4 percent of U.S. U.S. of percent 5.4 y was passed, to June June to passed, was in Czechoslovakia in uropean currencies currencies uropean stern Europe. The The Europe. stern he Marshall plan Marshall he market” and less market” n Congress in 50 to June 30, 30, June to Between sent to to sent ency, the the ency, and new new and question question e in the the in e w data data w ncial CEU eTD Collection ai. h gos iudt blne esrs h lqiiy posit liquidity the measures balance liquidity gross The basis. basis liquidity the on calculated those especially payments, between 1950 and 1960, an average annual increase of 5.5 percent (Cooper 1964, 155) 1964, (Cooper percent 5.5 of increase annual average an 1960, and 1950 between liberalization and financial stability, as opposed opposed as stability, financial and liberalization umnig mot, n fnnig nrsrcue re infrastructure post- financing European and imports, fast augmenting stimulate not did Plan Marshall N i te i mmes f h Erpa Eooi Cmuiy (EEC Community Economic European the of members six the in GNP 52 of fastgrowth. economic Euro 98). (Eichengreen1996, 1949 in States United the of insistence the at reside U.S. the trouble of case in whereas that assumption the on foreignandshort-te U.S. betweenthe distinction The flows. capital capital long-term the also includes it account, current the to addition 51 mea alternative to paid was attention much regime, rate exchange transf current unilateral net and income factor net imports), minus the of sum the as defined is which balance, account current the is reserves. reserves. i did so dwindled, surplus trade U.S. the As (ibid). percent 45 only of indust U.S. in rise a with compared 1960, and 1950 between percent 250 rose fini of imports U.S. the hand, other the On products. U.S. the to relative made that 1949 of devaluation currency the by supported partly were Europea The (ibid). percent 7 to 4 from rose share Japanese and 1961 per 33 from rose EEC the by exports manufacture world of share motn t pit u te ifrne aog aiu cnet o bala of Bretton Woods. surplus/deficit used during the concepts various among differences the out point to important For a more detailed discussion of these concepts, concepts, these of discussion more detailed a For and Eichengreen and (1991) Eichengreen and Long De The 1950s saw a rapid expansion of production and trade in Europe and Jap and Europe in trade and production of expansion rapid a saw 1950s The eoe oig o h dsuso o te aac-fpyet disequil balance-of-payments the of discussion the to moving Before 51

to the postwar protectionism. protectionism. thepostwar to see Stern (2007) and Kuwayama (1975). (1975). Kuwayama and (2007) Stern see ar bt hog mvn te oiis n uoe tow Europe in politics the moving through but pair, 79 a eooi got truh tmltn investment, stimulating through growth economic war 52

Nowadays, the most commonly used concept concept used commonly Nowadays, most the Uzan (1992) argue that contrary to the folk wisdom folk the to contrary that argue (1992) Uzan and on the official transactions transactions official the on and o o te ntd tts In States. United the of ion cent in 1951 to 46 percent in in percent 46 to 1951 in cent rm capital flows was basedwas flows capital rm ers. However, under fixed fixed under However, ers. t’ lis n foreigners on claims nts’ flows and short term US US term short and flows sures of the balance of of balance the of sures their products cheaper cheaper products their n and Japanese exports Japanese and n trade balance (exports (exports balance trade ts foreign exchange exchange foreign ts pe entered the path the entered pe shed manufactures shed rs 7 percent 70 rose ) nce of payments payments of nce rial production rial bi, t is it ibria, an. Real an. . The . ards ards , ,

CEU eTD Collection payments. Europe and Japan were hungry for hard currency to finance to currency hard for hungry were Japan andEurope payments. dollars Bret the the of problem fundamental the exposed of soon reserves exchange amount growing the However, pound). British the extent accumulate to banks central foreign made supply gold inelastic Balance-of-Payments Disequilibria 3.3 (BEA).showed surplus T a 0.4 billion 11). 2007, (Stern surplus billion $2.7 a transactions reserve official deficit billion $6.1 a showed balance liquidity net the 1969, in example, ca they rate, current its at rate exchange fixed the maintain abil the to attention draw equilibrium payments of balance the both although However, banks. central foreign from exchange foreign exporting by exchange foreign obtaining (2) reserves, exchange neces b currency the of depreciation the the prevent to market exchange of measure a is it deficit, the of case In rates. a supply private balance e to markets the foreign to supply authorities of amounts the reflects measure This flows. capital capital long-term account, current the adds balance transactions reser monetary depreci temporarya risk of the the higher balance, negative liquidity U.S. the on drain potential the T to addition reserves. measures official U.S. the on “call” potential a represented liabil U.S. the rate, exchange the defend to mobilized be not could 53 For an overview, see Eichengreen (2000) and Gavin and (2000) Eichengreen see anoverview, For In the beginning of the 1950s, there was not much concern about the U.S. U.S. the about concern much not was there 1950s, the of beginning the In

53 (2004). (2004). 80

n yield much different results. For results. different much yield n sary intervention in the foreign foreign the in intervention sary nd demand at current exchange exchange current at demand nd y (1) drawing down the foreign foreign the down drawing (1) y flows and short-term private private short-term and flows U.S. dollars (and to a lesser lesser a to (and dollars U.S. ity of the central bank to to bank central the of ity he liquidity balance thus thus balance liquidity he xchange which monetary monetary which xchange ation. The reserve official ation. ities to private foreigners private to ities gold, or (3) borrowing borrowing (3) or gold, their development. The development. their ton Woods system. The system. Woods ton alternative measures of measures alternative e. h lre the larger The ves. and the balance on on balance the and he current account account current he in the foreign foreign the in balance of of balance CEU eTD Collection commitment. military overseas not administration, his of part and Eisenhower D. imbalances Dwight payments President the blamed Anderson, Robert Treasury the 1958(Gavin in 2004,38). $3.7 billion while assets, dollar liquid and gold in billion $3.4 lost States United O (IFS). 1958 in USD billion 20.86 to 1957 in USD billion 22.86 from percent 10 amounts significant in rights convertibility their exercise to central Foreign 135). 2001, (Cohen 1958 in deficit billion $3.5 a to fell account when 1958, in grow to started dollar U.S. the of coverage gold the about deter payments of balance U.S. the progressed, decade the corp As and overseas expenditures military growing imports, rising run.” the making “bank vulnerable to gold, their dollar reserves the United States to foreiforincentives devaluationcreated pressuresand to led gold to gro The dollar. the support to ready were banks central foreign convertibility dollar continued the in confidence the on based system 54 2000, (Eichengreen reserves gold monetary U.S. exceeded States United deter to continued payments of balance U.S. the meantime, the In claims foreign when came 1960, breakthrough in psychological outflow continued. The these developments tr lower required higher American rather number than of confli in response flexible of strategy the to strike nuclear N the in shift the as well as crisis, Berlin the of face the st the However, protection. American from benefited that countries Treasury U.S. the from gold of share largest the taking countries i found president the Especially Europe. from troops American see Gavin (2004, 33-57). 33-57). (2004, Gavin see For a detailed overview of the Eisenhower administ Eisenhower the of overview detailed a For

54 h pooe slto ws teeoe t rdpo the redeploy to therefore, was, solution proposed The 81 ration’s policies in response to the payments imbal payments the to response in policies ration’s

cts with the Soviet Union. Both of Both Union. Soviet the with cts . U.S. gold reserves fell by almost almost by fell reserves gold U.S. . T srtg aa fo te full the from away strategy ATO wing amount of dollars relative relative dollars of amount wing orate outflows. The concerns The outflows. orate t irritating that the surplus surplus the that irritating t and gold loss on American on loss gold and gn central banks to convert to banks central gn were the same European European same the were rategy was abandoned in in abandoned was rategy Western Europe gained Europe Western oae a a eut of result a as iorated could work only if if only work could iorate and the gold the and iorate 5). The amount of amount The 5). oops. oops. ably Secretary of Secretary ably h US current U.S. the banks started banks

verall, the verall, onthe ances, ances, CEU eTD Collection rc pitd u t te vrauto o te .. olr I as creat also It dollar. U.S. the of overvaluation the to out pointed price possible to replace gold with uranium as our major major our as uranium with gold replace to possible gold (see Gavin 2004, 49).” 49).” 2004, Gavin (see gold sou a as value future great had This plutonium. and rates or a redeployment of American troops in Europ in troops American of redeployment a or rates n epne o h gl cii o 16, iehwr etitd h p the restricted Eisenhower gold. 1960, of of outflow crisis the gold halt the to to supposed was response ban In The overseas. gold (Cohendollar the dollar 2001,135). shortage glut. into The turned form the in transferred was deficit cumulative U.S. the of thirds ne the during but dollars, with financed being rest the stock, gold U.S. ha deficits U.S. of percent 10 than less Before1958, true. be to Treas U.S. the from gold for dollars of exchange demand to banks central Reser Federal the by required currency for coverage i gold of ounce per $40 to up shot price gold London the context, this In discrepanc The States. United the in price official the above worsened balanceU.S. United of and States payments. further the of flight the in resulted This recession. curb to monetary policy t British as German or the than already lower interest were U.S. rates gold further in result would inflation domestic by undermined dollar markets the convinced growth economic promote to policy expansionary e fall’s the win would Kennedy F. John that clear becoming was it t of search in gold into dollar from move further aggravated crisis U.S. the by held gold of amount the surpassed hands foreign in dollars $35.10 (ibid). g of price the 1961, March By 2009). (Koning price gold the suppressing w England Bankof resupplythe to agreedFed the which England, in of Federa York New the between deal informal an by supported further 55 te otos ugse b Adro i Nvme 19 November in Anderson by suggested options Other

reserve. “We now have $21 billion worth of refined refined of worth billion $21 have now “We reserve. rce of power.” He wondered “if this could be substi be could this “if wondered He power.” of rce ve Act, dollar devaluation, a move to the flexible flexible the to move a devaluation, dollar Act, ve e. Eisenhower was interested whether or not it woul it not or whether interested was Eisenhower e. 82

60 included the reduction in the 25 percent gold gold percent 25 the in reduction the included 60 y between the official and market market and official the between y d been financed by calls on the the on calls by financed been d the short-term capital from thefrom capitalshort-term the he safety. At the same time, same the At safety. he of gold, mostly to Europe Europe to mostly gold, of 55 he Federal Reserve eased eased Federalhe Reserve lection. His plan to use to plan His lection. h rc o gl was gold of price The l Reserve and the Bank the and Reserve l xt decade, almost two- almost decade, xt ith any gold it spent inspent it goldany ith outflows. In fact, the the fact, In outflows. Treasury. The Berlin Berlin The Treasury. ed incentive for the the for incentive ed ury. This turned out out turned This ury. rivate holding of of holding rivate that the value of of value the that old was back to to back was old n October, $5 $5 October, n exchange exchange tuted for for tuted uranium uranium d be be d CEU eTD Collection be accepted as the world’s reserve currency and the fixed exc fixed the and currency reserve world’s the as accepted be St United the If economy. world expanding the to liquidity the provide price rose above $35.20, the official price plus costs of shipping and shipping of costs plus price official the $35.20, above rose price Policy Response 3.4 same time. current the and deficit account current the running of impossible the do r global the supplying country the currency: reserve global of use the of problem the explained thus dilemma Triffin The down. confi Without convertibility. dollar’s the maintain to ability loss the and dollar the on pressuresdevaluation to lead also would it g economic world fuel to continue would outflow dollar the deficits, account Sta United the If spiral. contractionary a into economy global Unite the pull would shortage liquidity the deficits, account current ac current persistent run to but choice no had States United the testimony famous his in Triffin Robert economist by illuminated sell gold whenever the price rose above the official level. gold abovesell rose price whenever the official the i interventions through price gold the stabilize to agreed They required the of 50% providing States United with Pool, Gold a created central European seven and Reserve Federal the 1961, November 1 On 26). 2000, monet for market London the in gold buying from refrain to agreed

In order to keep the market price of gold close to the official the to close gold of price market the keep to order In hs eet epsd h prdxcl aue f h Betn od sy Woods Bretton the of nature paradoxical the exposed events These 83

dence, the dollar would no longer longer no would dollar the dence, eserve currency was supposed to to supposed was currency eserve hange rate system would break would system rate hange n the London gold market and and market gold London the n e otne unn current running continued tes to Congress. He argued that that argued He Congress. to ary purposes whenever the whenever purposes ary count deficits in order to to order in deficits count of confidence in the U.S. U.S. the confidence in of , European central banks banks central European , d States as well as the the as well as States d insurance (Eichengreen (Eichengreen insurance account surplus at the at surplus account a national currency as currency national a ates stopped running stopped ates gold supply for sale. sale. for supply gold rowth. However, However, rowth. tm as stem, banks CEU eTD Collection pay offsets, the intensification of the Berlin crisis and the er the and crisis Berlin the of intensification the offsets, pay ainl ula porm i Erp wr te eod ore f c of source second the were Europe in programs nuclear National amns ae uoen wne wehr hy ol b lf unprote left be would they whether wonder Europeans made payments

offset. offset. w Germany only but Japan and Italy with reached were States ha military purchase to agreements Minor 1961. in give to Germany wa government German the Although pressure. highest the to subject ac current the of part large a up made Germany in troops exc foreign the As States. United the from equipment military on gai the offset to theref umbrella security American the under countries administration the redeployment, troop the of threat the m U.S. of result a as exchange foreign gained that countries those n 4 aur 16, e ale eetd hs fe, s el s Briti as well as offer, this rejected Gaulle de 1963, January 14 On horse Trojan U.S. Kingdom United the considered Gaulle de Charles France. for prepared was offer Similar missiles. Polaris Briti the for basis the negotiated Macmillan Harold minister Kenned F. John president 1962 December in it, against initially was Al powers. nuclear independent become to wanted Britain Great and nonnuclea Germany keep to States United the enabled arrangement against weapons nuclear with Europe defend to commitment U.S. the in underm strategy offset the doctrine,response flexible the toward Combined States. United the in high too as perceived were defense On the current-account side, the administration took steps to reduce the reduce to steps took administration the side, current-account the On h Aeia atmt t da a ik ewe te ro costs troop the between link a draw to attempts American The 84

sh nuclear deterrent in the form of of form the in deterrent nuclear sh count deficit, Germany was the the was Germany deficit, count However, the French president president French the However, ection of the Berlin wall made wall Berlin the of ection ined the European confidence confidence European the ined as expected to provide a full full a provide to expected as dollars surplus spending by n hange cost of the American the of cost hange ilitary expenditures. Under Under expenditures. ilitary ore decided to push the the push to decided ore r. However, both France both However, r. though the United States States United the though rdware from the United United the from rdware in the Common Market. Common the in y and the British prime British the and y s initially reluctant to to reluctant initially s with the recent move move recent the with cted if the costs of of costs the if cted onflict. The offset offset The onflict. and the balance of of balance the and h plcto for application sh oit attack. Soviet deficit with with deficit CEU eTD Collection United States promised to end the threats of troop withdrawal. withdrawal. endUnited promised States to the threats of troop O in arrangement offset full to agreed Germans country, weaker de means policy bloc Franco-German the that realization German the of threats U.S. further the with However, agreement. offset 1961 atte Germany countries. surplus these of cooperation the on relied balance-of-pa U.S. the challenged other the on Germany and France important onall Élyséeconsultations calling was Treaty for questions conc the later, days Nine Community. Economic European the in membership reform were gloomy. reformgloomy. were syst monetary international the reform to how over disagreement a a France With standard. gold the to return a wanted and years two than resist who French from opposition strong a spec met plan called This (SDRs). liquidity of form nonnational new, a create monetar international an for a plan also announced administration The Johnson’s new to conference January in 1974(ibid). controls capital These 158). 155, 1977, (Block operations lending foreign encour that Program Restriction Credit Voluntary Bank’s Reserve S United the in offerings bond discourage to designed Tax Equalization inc controls These 1964. in controls capital of introduction the to diverted paym of balance U.S. the on burden further posed War Vietnam the of international dealings was finished and called for a return to a pur a to returna forcalled and prim finished dealingswas international the that proclaimed Gaulle de 1965, February 4 on conference h dtroae pltcl eain bten h Uie State United the between relations political deteriorated The However, as it turned out that the deficit could not be easily elim easilybe not could deficit the that out turned it as However, h Fac-mrcn ofit umntd n h bgnig f 95 I his In 1965. of beginning the in culminated conflict Franco-American The 85

ctober 1963. In response, the the response, In 1963. ctober e gold standard. At the same the At standard. golde pendence on another, albeit another, on pendence gd ak t lmt their limit to banks aged ed the proposal for more more for proposal the ed mpted to renegotiate the the renegotiate to mpted troop withdrawal and the and withdrawal troop m tepopcs f the of prospects the em, o te n hn and hand one the on s nd the United States in in States United the nd ents. The U.S. policies policies U.S. The ents. yments policy, which which policy, yments inated. The escalation escalation The inated. acy of the dollar in in dollar the of acy tates and the Federal the and tates luded. luded. were removed only only removed were ial drawing rights rights drawing ial ue a Interest an luded Franco-German press y CEU eTD Collection pound devaluation from $2.80 to $2.40 on 18 November. The decision came after a da a after came decision The November. 18 on $2.40 to $2.80 from devaluation pound the have to unanimously, could probably they which Resolution, a pass which the Bank of England spent ₤200 million tryingwhich spent ₤200million the Bank of(BBC, save England to undated). the pound 165). Further speculative attacks on the pound came in summer 1965 and summe and 1965 summer in came pound the on attacks speculative Further 165). Countries Market Common the of each and Japan, Canada, of banks central International S Bank for the York, New Reserve BankFederal of led theby line billion $3 a by saved was Britain spending. social increased deva possible the about concerns increased victory election Labour aut in already loomed Devaluation problems. economic of series long were figures trade negative the However, 1967). Nov. 24 (Time, history monthly such worst the million, $300 nearly of deficit gross a showed w sterling the 1967, gover November In British planned. as the go not speculation, did things However, feverish of weeks After again. once Drawingreform the Special reserve, ona Rights. based new the on concentrate to started administration the Instead, 125).” (ibid, di to all us brought which “system retur a as described he which a standard, to proposal Gaulle’s de rejected Johnson President 124). 2004, the from loans defaulted in us” owe they dollars billion half a and Undersecretary irritation. with met was Se statement and Congressmen angry last very of lot The “a were there that warned enablespurchaseassets.foreign the Americans to that suggesting expropriation,” of form “a investments foreign U.S. t addition Furthermo 1965). Feb 12 (TIME, January in in Franceconverted that million gold, into million $150 another of conversion planned France time, The run on the pound was triggered by the publication of October of publication the by triggered was pound the on run The 86

of credit from a consortium consortium a from credit of luation of the pound due to to due pound the of luation nators” who may “want to “want may who nators” nment announced a 14.3% 14.3% a announced nment printing of U.S. dollars U.S. of printing First World War (Gavin War World First saster in the early 1930s 1930s early the in saster f tt Gog Ball George State of international monetary monetary international gap in the country’s the in gap m 16, hn the when 1964, umn a mere episode in the in episode mere a French pay the four four the pay French trade figures, which which figures, trade re, de Gaulle called called Gaulle de re, ettlements, and the andettlements, the n to a pure gold gold pure a to n Gvn 2004, (Gavin as in trouble in as r 1966. The The 1966. r $150 o y, in in y, CEU eTD Collection e iie. er ht t ih tigr h dmn-fet com domino-effect the trigger might it that Fear limited. be sterling devaluation, which was one of the de Gaulle’s and the Common Common the and Gaulle’s de the of requirement forCommission’s entry. one was which devaluation, sterling to led May in began that negotiations accession Community UK’s the abroa shipped be to exports prevented Liverpool and London in strikes dock c bill million $180 Another (ibid). dollars to them exchanged and banks London than more pulled sheikhs Angry 1967). Nov. 24 (TIME, imports material exports its for costs shipping higher in year a million $600 some c The 1975. June until lasted which Canal, Suez the of blockade Egyptian whose well-being depended on their exports to Britain, or to other deva other to or Britain, to exports their on depended well-being whose ste small, were them of most However, currencies. their devalued and the followed countries two Twenty outfunded. be to out turned 1930s the in those trigbsd urny u nt t nw gold-backed 1 (TIME, new 24.5% by Iceland Ceylonand 20% by 19.45%, its not but currency sterling-based 5. to devaluation percent 14.3 initial its cut Kong Mauritius, Malta, Malawi, Jamaica, Ireland, Israel, latetoo and failed work. to t However, 1966. July 20 on package austerity an with responded government 56 Market,Common remained unchanged. Jap States, United the countries, trading major the of currencies eauto. n Wie os saeet h edre te oe s way a as move the endorsed he statement, Britain’s House White a after In devaluation. immediately dollar the from flight uncontrolled market calm to tried Johnson President traders. of minds the in linked reser international two sterling, and dollar of fortunes The dollar. f h 2, 6 ace te 43 Biih devaluatio British 14.3% the matched 16 22, the Of The effect of the sterling devaluation on the international monetary s monetary international the on devaluation sterling the of effect The cnmc rbes ee ope b pltcl Arab-Israeli political. by coupled were problems Economic h Uie Sae fae te fet f h seln devaluati sterling the of effect the feared States United The

7% due to a fear of political violence. Malaysia de Malaysia violence. political of fear a to due 7% Nepal, Sierra Leone, Spain and Trinidad and Tobago and Trinidad and Spain Leone, Sierra Nepal, 87 dollar. Denmark devalued by 7.9%, New Zealand by by Zealand New 7.9%, by devalued Denmark dollar. : abds Brua Cpu, ii Gmi, Guyana, Gambia, Fiji, Cyprus, Bermuda, Barbados, n: Dec 1967). Dec 1967).

eiie eauin smlr to similar devalutions petitive an, Canada, Australia and the the and Australia Canada, an, and higher prices for its raw raw its for prices higher and ve currencies, were closely closely were currencies, ve on on the confidence in in confidence the on on noneet f the of announcement the expectations of the of expectations the luing countries. luing s down and avoid an avoid and down s ofit e t the to led conflict rling-area countries countries rling-area $100 million out of out million $100 losure cost Britain Britain cost losure ystem seemed to to seemed ystem d (ibid). Finally, (ibid). d his move came move his for the UK to to UK the for British lead British valued its old old its valued ame, when ame, Market 56 . Hong . The

CEU eTD Collection balance of payments program within the next weeksbalance the next (ibid). within payments program of billion (Gavin 2004, 172). The European countries were growing more and mor and more growing were countries European The 172). 2004, (Gavin billion surcharge expected by Europeans met the opposition from Hous the andsurcharge public the expected Europeans theby met opposition expendi military the in increase an of expectations the fueled of Tet the again: mount to began news bad the the However, and strengthened. down calmed markets Gold work. to seemed program the 1968, of weeks payme of balance the reducing of aim the with that spending and program travel balance-of-payments new a announced citize requested Johnson and 1968, controls January trade 1 and On loans investment, strengthened in gold for excessive accumulations of dollars and that the adminis the that and dollars of accumulations excessive for gold in reim Americans the that conditions: two under pool the continue to agreed mar London the in intervention stop to recommend they that Switzerland, Germ Belgium, of behalf on also speaking said, Martin McChesny speakin bank central Belgian the of Ansiaux Hubert 1967, December pool gold the for Support dollars. more accumulate and gold more sell loss pool gold December, of end the By pool. gold the in share 41% a held Belg Switzerland, Italy, Germany, West Britain, by suffered doll the to due loss Further 1967). Dec 15 (TIME, billion $12.43 of low year sp gold-buying feverish of week the the sent that measures, loss week’s these single Despite biggest the gold, in million $475 from ratesdefend 4% 4.5%basic to (TIME raising by interest its the dollar Federal The ounce.” an $35 of price existing the at gold sell commitment the unequivocally “reaffirm could he that said he time, in compete to ability its in improvement needed the “achieve 88

Reserve declared its readiness to to readiness its declared Reserve ium and The Netherlands, who who Netherlands, The and ium tures, inflation rose and the tax the and rose inflation tures, world markets.” At the same same the At markets.” world U.S. gold reserves to a 30- to reserves gold U.S. any, Italy, Netherlands and Netherlands Italy, any, tration announces a strong strong a announces tration g on a phone to William to phone a on g eculation cost the U.S. U.S. the cost eculation of the U.S. to buy and and buy to U.S. the of nts deficit. In the first first the In deficit. nts was deteriorating. In deteriorating. was s o ii overseas limit to ns esv i Vietnam in fensive , 1Dec 1967). , burse the European the burse ket. However, they However, ket. es reached $1.5 $1.5 reached es ar reserve were reserve ar e reluctant to to reluctant e e. e. dollar CEU eTD Collection purposes. In the private market, the price of gold for industrial industrial for gold of price the market, private the In purposes. central of meeting Emergency March. 15 Friday on dealings bullion States asked for the closure of the London gold market, which handled 80% of 80% handled which market, gold London the of closure the for asked States 2006, (Roberts seconds 53 minute 1 every gold of million $1 losing was Pool second the of end the By 180). 2004, (Gavin March of week first the in gold (ibid). profit swift a them hand so and gold of p official the for gold purchase to banks central prevent to order t to it ‘Take speculators: the to saying are banks central J Hans Banker Zurich As demand. and supply of laws the by determined c for price $35-an-ounce the at gold for dollar the exchange to S continued United the market, a two order, official working to the system monetary In international introduced. the return was To transactions gold abroad. to supply gold U.S. entire the freed act This 1968). Mar 29 (TIME, 25% stoc v gold U.S. depleted the the time, of that At circulation. backing in currency gold a 25% requiring law a 1945 repealed Congress the 1968, Furthermor devaluation. British since discussed quietly a strategy selling and buying from refrain to agreed banks central as 1968, of years seven after disintegrated was pool gold the a result, on the weekend Washington, in D.C. 57 hs os mutd o lot % f h gl po rsre, r 15 billi $1.5 or reserves, pool gold the of 9% almost to amounted loss This ( 1874 to rush gold the from years 25 the during California in mined t 2.5 nearly – gold of billion $2.5 some of pool the drained frenzy gold the An estimated $2 billion went into the hands of spe of hands the into went billion $2 Anestimated h gl mre boe u sdel i Mrh Te od ol ot 13 milli $123 lost Pool Gold The March. in suddenly out broke market gold The The situation was grave. Between Britain’s November 18 devaluation 18 November Britain’s Between grave. was situation The

culators who were betting that the U.S. wouldraise U.S. the that werebetting who culators 89

he dentist.’ (TIME 29 Mar 1968).” In 1968).” Mar 29 (TIME dentist.’ he operation on Sunday 17 March March 17 Sunday on operation and speculative purposes was purposes speculative and rice and sell it for the higher the for it sell and rice k just equaled the required the equaled just k e, on Monday 18 March March 18 Monday on e, gold on the free market, market, free the on gold bankers was scheduled scheduled was bankers TIME , 22 Dec 1967). Dec 22 , TIME ae ad t allies its and tates . Baer put it: “The it: put Baer . defend the dollar dollar the defend ime the amount the ime te sse for system -tier week, the Gold the week, n (ibid).on nrl banking entral and March 15, 15, March and 0. United 10). the world's the the price theprice alue of of alue 57 n in on As CEU eTD Collection ra or jewels furs, for francs their exchange to tried panic in ot and stocks gold, bought and franc sold Paris in speculators franc the universa not was devalue to not commitment the in confidence the However, starte franc announcement, the to response In franc. devaluing of intention d Gaulle de However, devalue. to supposed was Franc billion. $1 almost IMF The Bonn. in bankers central and ministers finance of meeting $2 France lend to agreed G-10 1968, November In reserves. gold French the a to led exports lagging and imports and inflation of Rising costs. result a as ge 1969 1968 August May 10 on the 11.22% settle by to devalued increases was wage franc French The problems. economic offici di However, the was that the enoughbalance persisting resolve not of to payments and liquidity the both on calculated surplus, small a with Unit The armies. Treaty Warsaw the by Czechoslovakia of invasion due Europe from flight capital the by strengthened further balance the in improvement an to led outflow gold the stop to taken tighteni Fiscal Society. Great the of programs domestic his inc individual on surcharge percent 10 a signed Johnson 1968, June in Finally, diff a cuts, spending immediate agreeing of price the at taxes meetof theworld an liquidity economy. expanding needs Spec the reserve, international new a of creation the that hoped problems monetary the to solution temporary a only considered was How dollar. U.S. the on sw pressures depreciating could creating they currency, price, official at gold U.S. into dollars their convert gold its pri the although Furthermore, cooperate. that to refuse that governments clear it made States United the price, market 90

to May riots in France and August August and France in riots May to re stamps. The speculation against speculation The stamps. re g obnd ih h measures the with combined ng icult compromise which reduced which compromise icult speculative run on franc and franc on run speculative window would be shut to to shut be would window ial Drawing Rights, would would Rights, Drawing ial ever, the two-tier system system two-tier the ever, vate sector was unable to to unable was sector vate agreed to lend additional lend to agreed ed States ended the year the ended States ed and the central bankers bankers central the and ea srk pse up pushed strike neral her currencies. French French currencies. her f amns I was It payments. of al transactions basis. basis. transactions al ap them for another another for them ap d moving upwards. upwards. moving d eclared he had no had he eclared lly held. Some of of Some held. lly sequilibria. billion at the at billion persisting persisting ome ome CEU eTD Collection pressures toward revaluation. On 5 May 1971, the Bundesbank purchased $1 bil $1 purchased Bundesbank the 1971, May 5 On revaluation. toward pressures y ac 16. e ales einto i Arl eoe te ob the removed April in resignation Gaulle’s De 1969. March by percent 190).(ibid, oad i 17 reeto cmag, io ws ocre aot unemp about concerned was Nixon campaign, reelection 1972 Looking 200). his 1984, toward (Rockoff 1970 in percent 5.5 and 1969 in percent 6.1 to compared annualan at rose index price consumer the increase in the 1971, of months perce 6 to close was unemployment of rate U.S. the 1971, of summer with it the DutchAustrian franc, it guilder,with schilling the Swiss (ibid). and the allow pressures, inflationary of fearful authorities, German Then ceiling its at mark the keep to trading of minutes forty first ma to dollar from flight massive A 1971. in came revaluation Further annua an at rose prices 1971, of spring the and 1969 of autumn the Between revaluat the However, higher. percent 8.5 fixed was mark of value almost maintained was rate free The speculation. further the to float, to allowed was mark the 28 September on However, 180). 1992, Balfour of percent 87 by approved was but economics of professors sixty-one a produced which decision a action, took countries other none when quo status de government German the However, problems. monetary the to solution revaluat The pressures. inflationary about concerns to led supply trade strong Its problems. opposite exactly facedr The Germany mark. the on pressures appreciating put capital of inflow devaluedthe new Georges Pompidou the franc. president refe a in governments local and Senate the of reform proposed his foll 1969, April in down stepped Gaulle de when again up heated franc The international problems were coupled with the troubled domest troubled the with coupled were problems international The 91

(Cox and Skidmore 1999, 127). 1999, Skidmore and (Cox esulting increase in the money the in increase esulting for a month, after which the the which after month, a for ed the mark to float, taking taking float, to mark the ed ion seemed to be inevitable be to seemed ion rendum. Two months later, months Two rendum. balance and the continued the and balance stacle to the international international the to stacle o wsntbg enough. big not was ion the electorate (Michael (Michael electorate the owing the rejection of rejection the owing nt. In the first eight eight first the In nt. ic economy. By the By economy. ic rate of 3.6 percent, 3.6 ofrate

cided to keep the the keep to cided rk in spring put put spring in rk putting an end an putting omn and loyment rt o 4.5 of rate l protest from protest lion in the in lion CEU eTD Collection eivd ht xasoay oeay oiy hud e sd o reduce to used be should policy monetary expansionary that believed be converted into gold (Yergin and Stanislaw 1997, 60). During the first first the During 60). 1997, Stanislaw and (Yergin gold into converted be b not and expectations by propelled was inflation that belief

Federal Reserve Board, argued in favor of wage and price controls. price and wage of favor in argued Board, Reserve Federal Art Therefore, crisis. monetary international accelerate could man seen I’ve States. lowe However, 17). 2007, Butkiewicz and (Abrams said he unemployment,” United the in inflation on beaten anybody 1971, the British ambassador turned up at the Treasury Department Treasury the at up turned ambassador British the 1971, seco In issue. theoretical a longer no was dollar the on run The opinion. push Connally John Treasury of Secretary by persuasion and situation about concerns the However, 20). 2007, Butkiewicz and (Abrams America” scheme “a controls considered He 64). 1998, Stanislaw and (Yergin controls left experience this and Administration Price of Office the of t in worked II,he War World youngduring man a As intriguing. idea in Nixon expectations. inflationary calm would freeze The conditions. the dollar. Over the following four months, the G-10 countries negotiate countries G-10 the months, four following the Over dollar. the allowed t werecurrencies the European Then twoweeks. for markets down shut F anxious. more was abroad response immediate The 63). 1997, Stanislaw p u increase one-day largest the 32.9 announcement, President’s after Monday a registered Average Industrial Jones Dow The soared. market window,wages suspendingconvertibility,announced a freeze of 90-day and and the pr Nix president 1971, August 15 culmi On Policy. Economic New 1971 the of adoption August 13 Friday on began that meetings David Camp The 23). (Abra reserves of billion $3.6 over lost States United the August, io’ sec ws ecmd y h Aeia pbi ad media and public American the by welcomed was speech Nixon’s 92

y underlying demand and supply and demand underlying y him with a distaste for price price for distaste a with him u Brs cara o the of chairman Burns, hur s n Btiwc 2007, Butkiewicz and ms to request that $3 billion $3 that request to he tire-rationing division division tire-rationing he ed Nixon to change his his change to Nixon ed This was based on the the on based was This itially did not find this find not did itially p to then (Yergin and and (Yergin then to p pol bae on beaten people y it. “I’ve never seen seen never “I’ve it. d the reform of the of reform the d nd week of August August of week nd on closed the gold the closed on oints increase on on increase oints ring interest rates rates interest ring Te .. stock U.S. The . oreign exchange exchange oreign the international the twelve days of of days twelve o float against against o float to socialize socialize to ae i an in nated ices. ices. CEU eTD Collection policy undermined the dollar peg to foreign currencies. The attack attack The currencies. foreign to peg dollar the undermined policy the and inflation of manifestation the suppressed controls price aia cnrl ws h rsmd urn acut convertibility. account current resumed the was controls capital capit the of control the poi on reversal relied A system controls. capital Woods the Bretton around the way Although its found capital ImpactBrettonof the Integration 3.5 the Woodson Europeancurrencies upward. r 1973 early in dollar the from flight another of result a as dollar de percent 10 The band. Smithsonian the from withdrawal British the were tamed. loc and levees of series the of part were They stream. flowing capi inve channel to just not couldwere they because flood the back efforts held Controls account. current complicated banks licenses which import obtain in to assets The towar credit channel to markets financial capped. regulated Governments were rates Interest (Eichengreen 1996,94): more worked controls capital 1958, in convertibility account current of only 1.7% from September through November (TIME, 3 Jan 1972), the U.S. U.S. the 1972), Jan 3 (TIME, November through September from 1.7% only of withinestablish rates exchange at currency another we rates exchange fixed adjustable the However, percent. 2.25 to 1 b Fluctuation revalued. Benelux were currencies the and the mark deutsche The percent. 8 by devalued was dollar U.S. The dollar. U.S. the against revalue to agreed countries the which in D.C., Washington, in Agreement Te of Group the 1971, December In system. monetary international 58 This means that nonresidents were permitted to exc to permitted were nonresidents that means This

ed margins. margins. ed hange the currency they earned in the course of tra of course the in earned they currency the hange 93

of Capital Markets ofCapital ks with which the raging rapids rapids raging the which with ks living costs went up at a rate rate a at up went costs living tal transactions through the the through transactions tal d strategic sectors. The need need The sectors. strategic d t n h efcec o the of efficiency the in nt 58 esulted in the float of the of float the in esulted on sterling in 1972 led to led 1972 in sterling on n signed the Smithsonian Smithsonian the signed n ni te eun o the to return the Until re not to last. Although Although last. to not re valuation of the U.S. U.S. the of valuation one rock in a swiftly swiftly a in rock one yen, the Swiss franc, Swiss the yen, t ee restricted. were st r es s planned as less or ands from widened their currencies currencies their expansionary l lw, the flows, al de for de CEU eTD Collection rsue, hra cutis unn cret con dfct rel deficits account current running countries whereas pressures, runni Countries management. macroeconomic of tool a as used widely be be liberalized in 1952, residents were allowed to purchase foreign foreign purchase to allowed were residents 1952, in liberalized be rvdd wy f on itrainl uies n L in business international doing ou of dollars way of a flow provided the on grew market the York, New capital controls, and a testimony to their porousne their to testimony a and controls, capital Euroc The available. were currencies many maturity, dolla a combining through implicitly or explicitly, new roles in a world where capital controls are muc are controls wherecapital world in a newroles

late 1950s as a mechanism for the Moscow Norodny Ba Norodny Moscow the for mechanism a as 1950s late aia cnrl, s el s hs o te ntd St United the of those as well as controls, th capital that market the in money placing were depositors encumber less were controls capital U.S. of net the surpluses imposed controls on capital inflows to deal with the ap the with deal to inflows capital on controls imposed surpluses Capit system. Bretton-Woods the under missing was standard gold under p the to similar adjustment balance-of-payments of disequili mechanism balance-of-payments the facing when on rely to choices outflows to deal to outflows the depreciation. with pressures currency onthe turned into surplus. In response, restrictions on the foreign direct i direct foreign the on restrictions current response, In surplus. into turned its 1950s early the by However, 60-64). 1993, Pauly and Goodman (see prote to exports capital of controls strict on relied therefore restricted. The dollars were placed in London becau London in placed were dollars The restricted. durin London in market Eurodollar the of growth the

59 growthLondonthe (ibid). of 1960s maker the Eurodollar during in evidence visible most The of payments. balance recorded the in omissions size the by documented best is leakages of amount The 124). 2008, (Shafer exc foreign to access having those with arrangements through moved suitc in borders crossed money Some efficient. less be to out turned Shafer (2008, 124) observes: Perhaps the most spec most the Perhaps observes: 124) (2008, Shafer ept te eraig fiiny f h cptl otos c controls, capital the of efficiency decreasing the Despite emn eprecd urn acut eiis n h ery y early the in deficits account current experienced Germany oee, fe te eun o h cret con cnetblt, the convertibility, account current the to return the after However,

ss. Having grown to maturity, the market has lived lived has market the maturity, to grown Having ss. r deposit with a foreign exchange swap contract for contract swap exchange foreign a with deposit r h less important. important. hless ed and hence more valuable than in New York. Many o Many York. New in than valuable more hence and ed ts Ide, h mre ws o lmtd o dollars to limited not was market the Indeed, ates. se they could earn a higher yield there, since doll since there, yield higher a earn could they se g the 1960s. Although this market had its beginning its had market this Although 1960s. the g tacular visible evidence of leakages from capital f fromcapital leakages of evidence visible tacular urrency market at the end of the 1960s was a creati a was 1960s the of end the at market urrency y a otie otie hi on onr’ network country’s own their outside obtained had ey no a a ie hn trig rnatos ee tig were transactions sterling when time a at ondon 94 o te ntd tts ept cptl otos It controls. capital despite States United the of t

nk and others to hold dollars without putting them them putting without dollars hold to others and nk ct its foreign exchange reserves reserves exchange foreign its ct rice-specie-flow mechanism mechanism rice-specie-flow 59 nvestment abroad began to to began abroad nvestment preciation and inflationary inflationary and preciation e o cnrl o capital on controls on ied

securities in 1956 and by and 1956 in securities ountries had few other other few had ountries ases but most of it was was it of most but ases ra Self-equilibrating bria. ears after the war and and war the after ears hange through trade trade through hange al controls came to to came controls al of leakages was the wasof the leakages ng current account account current ng of the errors and errors the of aia controls capital on to fulfill fulfill to on ars outside outside ars account the same same the lows was was lows Either . s in the the in s on of of on also also f the the f htly of of in CEU eTD Collection pressures for the yen revaluation. The rest of the world relie world the of rest The revaluation. yen the for pressures Bundesbank oe epnin n ifainr pesrs I odr o ep h pric the keep to order In pressures. inflationary and expansion money was dollar the with point intervention the whenever market exchange worl the of rest the by immediately followed not was example ove outflows capital on restrictions its dropped States United the controls capital the of dismantling the However, liberalization. economy. The markets. world the in expensive more sectors export its harm thus would Revaluation strategy. growth Ger because feasible not politically was revaluation However, t pressureson appreciation thegrew, surplus account current the the for matched not was liberalization the However, 60). 1993, Pauly and w permitted generally was residents by capital of export 1957 capital controls. capital controls. oee, hr-em aia ifos otne t b dsorgd n orde in discouraged be to continued inflows capital short-term t However, in surpluses account current generate to began Japan when only loosen ca on controls The industries. leading the to channeled was capital discour were inflows investment direct and outflows but allowed were loans currency foreign and investment portfolio of form the in dollars curre hard of inflows Certain 64-70).Pauly 1993, and Goodman strategy (see were capital short-term of outflows and inflows both over controls 60 Notice that China faces a similar problem nowadays problem similar a faces thatChina Notice Situation in Japan was similar. Japan relied on export-led growth export-led on relied Japan similar. was Japan in Situation h dsnerto o te rto Wos pnd h wy o te capit the for way the opened Woods Bretton the of disintegration The 60

a t rl o cptl otos o ii frhr nlw f h ca the of inflow further limit to controls capital on rely to had

Bundesbank . . 95

therefore intervened in the foreign foreign the in intervened therefore d on the similar approach to the the to approach similar the on d ithout authorization (Goodman authorization ithout he Deutsche mark intensified. mark Deutsche he many adopted the export-led export-led the adopted many r the years 1974 and 1975, its1975, and 1974 years the r came very slowly. Although slowly. very came by making their products products their making by d, who faced persisting persisting faced who d, the key elements of the the of elements key the pital outflows began to to began outflows pital aged. The accumulated The aged. from American banks American from reached. This led to to led This reached. capital inflows. As inflows. capital strategy and capital capital and strategy t dces the decrease to r ncy, mainly U.S. U.S. mainlyncy, he early 1970s. 1970s. early he saiiy the stability, e pital into the the into pital l account al CEU eTD Collection by borrowing and later by using its reserves. In 1981, the 1981, In reserves. its using by later and borrowing by oiy Asrla n Nw eln dsate ms cnrl i 18 ad 1984, and 1983 completed France in and Denmark 1986, controls by liberalized fully Netherlands most dismantled Zealand New and Australia policy. to a deficit of 10.5 billion mark in 1979 (ibid, 62). Germany was forc was Germany 62). (ibid, 1979 in mark billion 10.5 of deficit a to bi 17.5 of surplus a from account current German the sent shock oil second appr mark the prevent to inflows capital on controls the tightened Marc in crisis currency the of midst the In 57). 1993, Pauly and (Goodman US billions 650 to 1970s late the in USD billions 100 from grew market the on turnover daily costly more and effective less The controls made that factor Another telecommunications. in especially innovations, decision controls phase as to a capital out Unified part Progra Market of the extent large a to was Community European the in liberalization 136). 2008, (Shafer 1980s late the in liberalized Austria and countries a 1990 and 1989 in rapidly liberalized Norway and Sweden 1980s, the of end the t dollar, weakening of face in fact, In 60-64). 1993, Pauly and Goodman (see it dismantle not did it flows, capital on restrictions the loosen to Ge and 1973 in float to allowed was mark deutsche Although control. exchange capital electedConservat freshly the when 1979, October in account capital lib The Kingdom United 160). The 1980s. the 2004, in only momentum Taylor gained liberalizations and (Obstfeld problems macroeconomic n e apeito ad eotd o otos n hr-em nlw once mar law new inflows the and 1979 short-term in liberalization account capital on announced controls to resorted and appreciation yen on the f to started as Japan 1976, in again surplus to However, switched account current 64-70). 1993, Pauly and Goodman (see 1975 and 1973 between deficit financi enable to inflows capital on controls eased Japan controls. 96

Bundesbank s control apparatus entirely entirely apparatus control s ng of the current account current the of ng ive government abolished abolished government ive ace the familiar pressures pressures familiar the ace motivated by the 1988 1988 the by motivated ed to finance the deficit deficit the finance to ed cain Hwvr the However, eciation. was the technological technological the was ked a turning point in point turning a ked lifted the remaining remaining the lifted the liberalization by by liberalization the The capital account account capital The D in the late 1980s 1980s late the in D m. m. llion mark in 1978 in mark llion h 1973, $3 billion $3 1973, h world’s exchange exchange world’s he again. Japan Japan again. rmany began began rmany Bundesbank nd other EC EC other nd rlzd its eralized account the the

CEU eTD Collection ota dcds eoe einn a tee acn i te fina the in ascent steeper a beginning before decades postwar behind. came in 1960 when the amount of dollars in foreign hands surpassed the surpassed hands foreign in dollars of amount the when 1960 in came p The gold. to reserves dollar their convert to banks central foreign and pressures devaluation to led This emerged. gold into convertibility t about concerns reserves, dollar growing As glut. dollar the into turned shortage accumulated dollar the 1950s, the Throughout banks central gover by dominated were financial aid. years postwar first the in transactions inte Thus, currencies. European of devaluation the and aid financial U.S. curb was Europe in shortage defici dollar The currency. hard the obtaining trade running Europe, diminished. savings the and depleted its liquidated, were assets Europe’s hand, other the On creditor. 3.6 Conclusion 3.6 century. gradual a to Two, War World and Depression Great the during decline Wor of eve the on reached height the from starting pattern, shape nineteenth late the in advanced mobility capital international measur the of most for that demonstrate (2004) Taylor and Obstfeld l not would who those that threat a posed markets financial world the g the Second, (ibid). dayone in currencies European convertedinto were h Uie Sae eegd rm h Scn Wrd a a te world’s the as War World Second the from emerged States United The All of these changes enabled the renewed integration of the g the of integration renewed the enabled changes these of All 97

century and then followed a U- a followed then and century ld War one, through a sharp sharp a through one, War ld dcds f h twentieth the of decades l foreign exchange reserves reserves exchange foreign sychological breakthrough breakthrough sychological ed only after the massive the after only ed es of market integration, market of es lobal financial system. financial lobal iberalize would be left be would iberalize s hd o en of means no had ts, nment-to-government nment-to-government created incentives for incentives created rowing integration of integration rowing recovery in the first the in recovery amount of gold held held gold of amount e otne dollar continued he ntoa financial rnational the European European the largest CEU eTD Collection beyond means. its prevent them from undermining the pegs. These capital controls pre controls capital These pegs. the undermining from them prevent pressures on the German government to “offset” part of the balan the of part “offset” to government German the on pressures to up shot price gold London the context, this In Treasury. U.S. the by currencies were pegged to the U.S. dollar. There were strong res strong were There dollar. U.S. the to pegged were currencies t pegged was dollar U.S. the where standard, gold-dollar a into T evolved adjustment. payments of balance the to related differences 2004) Eichengreen especially (see examination closer upon occur syste monetary international II Woods Bretton the in country center reestabli This States. United the with surpluses account current dollar accumulate to willing were countries Asian system, the Woods under dollars U.S. of hoarding Japanese and European to Similarly the support to undervalued them kept and dollar U.S. the to currencies countrie Asian 1960s, the and 1950s the of Europe to Similarly reborn. Woods

Dooley window, suspendingdollar convertibility 1971. August the in unilater to decided Nixon president dollar, U.S. the on run potential the rising the Facing dollar. the from flight massive a after 1971 in and 1969 in revalued mark The 1969. in devaluation franc the and 1967 in devaluation m on turbulence The system. Woods Bretton the by established rates spec further prevent to failed measures these However, deficit. large a up made these as Germany, in troops U.S. maintaining h US dpoay eid n eea maue, uh s h crea the as such measures, several on relied diplomacy U.S. the States. United the in price official the above $5 1965, October in Although there are many similarities between the two periods, two the between similarities many are there Although et al.et (2003) argue that the global imbalances of the last decade we decade last the of imbalances global the that argue (2003) 98

part of the U.S. current account currentaccount U.S. the of part ulative attacks on the exchange the on attacks ulative unemployment, inflation and inflation unemployment, shed the United States as the as States United the shed To deal with the gold crisis, gold the with deal To he original Bretton-Woods Bretton-Woods original he trictions on capital flows to to flows capital on trictions ce-of-payments burden of of burden ce-of-payments tion of the Gold Pool or or Pool Gold the of tion vented large transfers of transfers large vented m and enabled it to live live to it enabled and m ses n xhne for exchange in assets Frt f l, hr are there all, of First . arkets led to the pound the to led arkets significant differences significant $40 per ounce of gold gold of ounce per $40 xotld growth. export-led ly ls te gold the close ally gl ad other and gold o Bretton original s pegged their their pegged s re Bretton Bretton re again CEU eTD Collection eid inse icesn cptl oiiy wih ae it makes which mobility, capital increasing witnessed period by domestic policies. The International Monetary Fund was suppose was Fund Monetary International The policies. domestic by t shocks temporary stabilize to supposed were countries Instead, adjustment payments of balance the standard, gold classical the post-Bretton the to contrast in Thus, countries. between savings net alternative the treasuries 23). (ibid, U.S. to government euro-denominated and asset reserve a be to euro for enough e The euro. the alternative, viable a is there Today 1960s. the in runs Briti The inelastic. is supply Gold currency. reserve world’s since 1986. and hasa been net debtor a with 1982, since deficit account current a running U been has States the hand, other the On 10). (ibid, 1959 of exception single a with 1971, and 1954 account current U.S. The world. the of rest the to banker a as acted maintain the status quo. themaintain status pe to continued world developing the of part significant a e whereas flexible towards moved gradually countries developed the of most 1971 B the of collapse the following contrast, In expected. as work not did disequili balance-of-payments experiencing countries to liquidity Finally, in the Bretton Woods period, the United States remained a remained States United the period, Woods Bretton the in Finally, Second, in the Bretton Woods era there were no good substitutes for t for substitutes good no were there era Woods Bretton the in Second, 99

sh pound was subject to repeating to subject was pound sh more difficult and costly to to costly and difficult more o their balance of payments payments of balance their o bria, although this facility facility this although bria, a nt self-equilibrating. not was -Woods period, as well as as well as period, -Woods single exception of 1991 of exception single was in surplus between surplus in was retton Woods system in system Woods retton ter urnis The currencies. their g d to provide additional additional provide to d uro markets are liquid liquid are markets uro securities provide an provide securities nt rdtr and creditor net he dollar as the as dollar he xchange rates, rates, xchange nited nited CEU eTD Collection periods and were followed by periods of unusually l unusually of periods by followed were and periods expansions monetary worldwide by but productivity, price shocks in 1973 and 1979, the oil-importing countries experienced a s a experienced countries oil-importing the 1979, and 1973 in shocks price eea oeve o mjr xlntos f h relat Kilian(2004). the of explanations major of overview general macroeconomy the affecting shock oil not is it and pressu upward The steep. very be can ground, inthe pi on depends which oil, for curve supply effective

4.1 Petrodollar Recycling Petrodollar 4.1 458). However, during the 1970s, this role was this over458). 1970s, However, taken institutions. theby during the private deficit and Ten) of i Group the of countries banking (mainly countries surplus by intermediated was financing payments all of one-third la the In Fund. Monetary International the predominantly institutions, payments of balance the of source main the Woods, Bretton the Under a supply, sudden per drop oil by quadrupled in the of barre price oil 12$ nearly 1974to oil in cuts introduced and Israel supported that countries em to exports The war. Kippur Yom the during military Israeli the supply response in embargo oil an proclaimed Syria) andEgypt and OPEC Countrie Exporting Petroleum Arab of Organization of members the w shock oil 1973 the after countries oil-exporting the by accumulated alternativedemand-driven an provide (2002) t Kilian in embargo and war Middle-East the of role The 61 h blne f amns iacn udret sgiiat cha significant a underwent financing payments of balance The hs eeomn ws o lre xet eae t cret ac current to related extent large a to was development This The increase in the oil price shifted the current account balan account current the shifted price oil the in increase The CHAPTERGLOBAL– 4 IMBALANCES THEIN POST- BRETTON-WOODSPERIOD

pelines and tanker capacity at least as much as on on as much as least at capacity tanker and pelines but macroeconomic conditions affecting the oil pric oil the affecting conditions macroeconomic but re on oil prices in the 1970s was thus caused not b not caused was thus 1970s the in prices oil on re ow real interest rates. Thus, the causality here is here causality the Thus, rates. interest real ow osi bten i ad areooy se asy an Barsky see macroeconomy, and oil between ionship 100 con o ol rc mvmns i te hr rn t run, short the in movements: price oil of account he oil price increase is not universally held. Bars held. universally not is increase price oil he ht rv otu lvl aoe oeta fr sustai for potential above levels output drove that

production. As a result of of result a As production. to the U.S. decision to re- to decision U.S. the to ag bne petroleum banned bargo countries (Cohen 1982, (Cohen countries hen on 17 October 1973 October 17 on hen financing were official official were financing ces. Following the oil the Following ces. e 90, s uh as much as 1960s, te s (Arab members of of members (Arab s siuin between nstitutions nge in the 1970s. 1970s. the in nge harp deterioration deterioration harp on surpluses count

oil reserves reserves oil y a shift in in shift y a e. For the For e. reversed reversed l. 61 ky and and ky

ned ned he d d CEU eTD Collection began to deal in dollars. This was beneficial becau beneficial was This dollars. in deal to began e anand ad ht hs xetto peald ni te eod b second the until prevailed expectation this that and maintained, be prices. prices. lcd hs oe i te uoolr market. Eurodollar the in money this placed United States were not under the jurisdiction of th of jurisdiction the under not were States United 1958 in develop to started market Eurodollar The 62 an of permanence hi the that was expectation predominant the the 1975 by that assumed is of wid a expectations certainly was there initially doubt no Market and reconstructed, correct. is view temporary, l as perceived have is shock will the If imports position. account oil current on dependence differential case, that In increasepermanent: was as perceived t if i outcome different a least suggested 210) 208, and (1981, Sachs However, imports economies. oil on dependent heavily inc were deficits that account economies current that held view conventional The surpluses. exp countries oil-exporting hand, other the On account. current their of followed the Iranian revolution. These assumptions correspond to what what to correspond assumptions These revolution. Iranian the followed

of the issue, see Chapter 5).of the issue, see Chapter deteriorate account current the savings, their lower they As future. a prices oil higher of burden the spread to abroad borrow and time t try they income), their in reduction temporary (a temporary incr an expect consumers if words, other In income. the in changes i to shocks permanent the balance, trade the in variation of source transitory the Whereas balance. trade the on effects different h eooy i wud ed o nltoay rsue. Oil-exporting pressures. inflationary to lead would it economy, the the If populations. small or industrialization of stage early the invested been have not could it that rate a such at accumulated ah’ 18) hs hw ta tastr ad emnn sok t icm ha income to shocks permanent and transitory that shows thus (1981) Sachs’ The inflow of petrodollars to oil-exporting countries in payment fo payment in countries oil-exporting to petrodollars of inflow The

e Federal Reserve and were, therefore, subject to m to subject therefore, were, and Reserve Federal e se deposits denominated in US dollars at banks outs banks at dollars US in denominated deposits se when European banks, notably in London and Switzer and London in notably banks, European when 101 62 h bns cie n h Erdla market Eurodollar the in active banks The

o smooth their consumption over over consumption their smooth o shocks to income are the main main the are income to shocks e dispersion of expectations. It expectations. of dispersion e domestically, either because of because either domestically, money were allowed to enter to allowed were money however, the conventional the however, ittle effect on the relative relative the on effect ittle s (for a detailed discussion detailed a (for s ncome determine only the the only determine ncome ease in the oil price to be be to price oil the in ease gher relative price would would price relative gher nd shift part of it to the to it of part shift nd oil shock cannot be be cannot shock oil ig price increase that that increase price ig te self-sufficient the n actually happened to to happened actually countries, therefore, therefore, countries, recd growing erienced r oil exports was exports oil r esd ot in most reased he oil price price oil he uch less less uch ide the the ide land, land, ve CEU eTD Collection pursue such unilateral policies (ibid, x).” (ibid, policies unilateral such pursue borrower to 15 percent of the bank’s capital and loans to an assor an to loans and capital bank’s the of percent 15 to borrower bank could buy U.S. Treasury securities outside of outside securities Treasury U.S. buy could bank el wr sce bcue h Uie Sae hd pro had States United the because secret were deals and indeed by most of the world – was to sellbonds was to – world the mostof by indeed and face problems myriad the to answer His (…) salesman. appoint his “Before petrodollars: recycling in role I deficits. capital with (LDCs) countries developed Michael Blumenthal cut a secret deal with the Saudi the with deal secret a cut Blumenthal Michael intermedi an as acted that markets view capital international mainstream the challenges (1999) Spiro 63 Stat United the market. the of expansion in deposits similar than regulation loans (Vásquezgovernment individual owned 1996). were a treatedby as all foreign li that laws with complying avoid to allowed also were banks The patr a perhaps and beneficial, was countries developed less the that recyc of the that process banks large the told includingAdministration, me, remarked Ford President to counselor economic former Seidman, to petrodollars the recycle to encouraged were Banks issues. bond and countr deficit account current to surpluses petrodollar the recycled and some African countries but Eastern European countries entered countries European Eastern but countries African some and (ibid). episode However,poor of this lending countries default. foreign upin ended to compound pe 80 annual Approximately (ibid). percent 24 analmost of rate growth 1978, of end the by billion $159 approximately to 1970 of end the appr from grew sources all from America Latin of debt outstanding inc borrowing Their financing. external for need increased an and deteriorat the in resulted price oil the in increase the However, t attracted economies soaring Their 192). 1997, (FDIC average on year gr (LDCs) countries developed less the 1973-74, in quadrupled price oil For shock. oil first the before began countries these to lending the The market channeled the funds to developing countries, mostly to to mostly countries, developing to funds the channeled market The ment to public office, Simon had been a very succes very a been had Simon office, public to ment nstead, he argues that American hegemony played the played hegemony American that heargues nstead, . In 1974, Simon negotiated a secret deal so the Sa the so deal secret a negotiated Simon 1974, In . r bten PC ain wt cptl upue and surpluses capital with nations OPEC between ary s so that OPEC would continue to price oil in dolla in oil price to continue would OPEC that so s the normal auction. A few years later, Treasury Sec Treasury later, years few A auction. normal the s Te erdla rccig n h 17s e t r to led 1970s the in recycling petrodollar The es. 102 ie ohr nutilzd eorce ta i woul it that democracies industrialized other mised d by the Treasury – and by the United States in gen in States United the by and – Treasury the by d the petrodollar recycling was market-driven, i.e. i.e. market-driven, was recycling petrodollar the

rcent of this debt was sovereign was debt this of rcent iotic duty (FDIC 1997, 206).” 206).” 1997, (FDIC duty iotic ion of their current accounts accounts current their of ion more than a decade before before decade a than more reased significantly. Total Total significantly. reased tment of state institutions institutions state of tment mited a bank’s loan to a a to loan bank’s a mited ies through bank credits credits bank through ies the market too. market the oximately $29 billion at billion $29 oximately he foreign investment. investment. foreign he the developing world. developing the ew by 6 percent per per percent 6 by ew ling petrodollars to ling to petrodollars te nie Ford entire “the ai American Latin 63 udi central central udi

In fact, In sful bond bond sful rs. These These rs. greatest greatest retary retary not d less less eral, eral, apid that that

CEU eTD Collection billion, or approximately 74 percent of the total LDC debt outstanding debt LDC total the of percent 74 approximately or billion, developing all for costs debt-service LIBOR, in increase point billion to $55 billion, more to billion increase than a (ibid). 50 percent 147 percent of their capital and reserves at the time (ibid). 147 percentat and (ibid). the their time reserves capital of constit and banks, U.S. largest eight the to owed was billion $37 roughly

America, and the four largest – Mexico, Brazil, Venezuela, Venezuela, Brazil, Mexico, – nations largest four the the of and Sixteen America, 191). 1997, (FDIC so doing of process the in to debts Aug their rescheduled had in billion $329 owing countries out 27 1983, October broke countries American Latin the of crisis i meet debt to unable be would The it that States United the announced Mexico w exceeded power. earnings situation the in resulted prices commodity in drop and recession coupl costs debt-servicing in Increase 38). fn 205, (ibid, billion $41.1 risi 1978-80, during tripled almost payments interest countries, these that estimated was It 38). fn 205, (ibid, percent 15.8 averaged they 1982 through percent 10.2 averaged rates LIBOR market. dollar-denominated a Euroc as rates interest U.S. short-term in changes to sensitive L to priced ra States were United the credits when LDCs 1980s early the the in of arose problems Most The inflation. high combat the outstanding loans of the eight largest money-center banks rose banks money-center largest eight the of loans outstanding the the during LDCs the to lending their increased banks U.S. demand, this res In 197). 1997, (FDIC billion $327 to billion $159 from increasing doubled, than A Latin total 1982 of end the and 1979 of start the Between accelerated. fe te eod i sok n 99 te orwn b Ltn mrcn countr American Latin by borrowing the 1979, in shock oil second the After 103

urrency deposits were primarily primarily were deposits urrency nations rose by $2 billion. For billion. $2 by rose nations n Agnia oe $176 owed – Argentina and IBOR rates, which were were which rates, IBOR from approximately $36 $36 approximately from ng from $15.8 billion to billion $15.8 from ng (ibid). Of that amount, that Of (ibid). ts debt obligations. By By obligations. debt ts following four years: four following hen the foreign debt debt foreign the hen for every percentage percentage every for ised interest rates to to rates interest ised d ih h global the with ed uted approximately approximately uted 1980; for 1981 and 1981 for 1980; merican debt more more debt merican ee rm Latin from were ust 1982 when when 1982 ust banks or were or banks ponse to ponse ies CEU eTD Collection bank capital. This posed threat not only to the U.S. banking system banking U.S. the to only not threat posed This capital. bank ak t cos fo a eu f pin t rdc o ices ter ex their increase or reduce to options of menu a from choose to banks Nevertheless, the recovery appear. not did funds. cap international of off cut wereleft These countries.debtor stop banks U.S. the crisis, the to response In system. financial a treated was plan Brady the of announcement The 64 exc significantly thus banks commercial U.S. the of exposure The 19) eosrt ta te tc pie o US mu anno theBrady to banks Japanese and U.S. all among U.S. of prices stock the that demonstrate (1993) ht mhszd etfriees o hgl idbe cutis T countries. indebted highly for debt-forgiveness emphasized that administr Bush new the of Treasury the of Secretary the indebted, ca or enterprises state of privatization tariffs, taxes, of The reforms. market-oriented on based were programs IMF-sponsored commercial through loans new provided were countries Developing liquidity as treated was crisis the 1985, to 1982 from phase, first pha several in with dealt was problem The IMF. the and States an active strategy.”would debtbe reduction without destabilizing by adjustment that view the reinforced 1989 early in Venezuela, Indeed,the debt.” or democracy “choose to was not or strategy Brady concern. geopolitical and security a as not issue political, the saw by “Washington driven was Plan Brady the that argues (1996) The general default was avoided through rescheduling orchestrated by by orchestrated rescheduling through avoided was default general The hn t eae la ta dvlpn cutis ee o gettin not were countries developing that clear became it When

uncement and the Mexican agreement. agreement. Mexican the and uncement 104 tntoas ak soe te togs pstv re positive strongest the showed banks ltinationals “od es b te akt atcpns Ua e a et Unal participants. market the by news” “good s

ital market, unable to raise further further raise to unable market, ital ses (see Vásquez 1996). In the In 1996). Vásquez (see ses ped making new loans to the to loans new making ped pital account liberalization. liberalization. account pital , but also the international the also but , ihy netd countries indebted highly ation devised a new plan plan new a devised ation n nt ovny crisis. solvency not and banks and the IMF. The IMF. the and banks bloody riots in Caracas, in riots bloody e rd pa enabled plan Brady he akt considerations: market, hte t pru the pursue to Whether se included reduction reduction included se posure. ls bt more but less g ee ter total their eeded 64 h United the Vásquez action action l. CEU eTD Collection policy (Barsky and Kilian 2001; de Long 1995; Taylor 1998). This monetary This 1998). Taylor 1995; Long de 2001; Kilian and (Barsky policy t of mechanism the through crisis oil the and inflation the between doubtful that the oil shocks were the cause of the 1970s inflation. shocks inflation. 1970s were the that oil doubtful causeof the the price oil the before began policy in ease excessive the As 1995). them made Depression Great the from over carried unemployment unem rising or inflation rising the tackling between choose to had Each 1998). (Taylor inflation low defend to Reserve Federal the for cur Phillips long-run a in beliefwidespread causedtheby was im Cre udr rsue rm al tet n 99 We h ass he When 1979. in Street Wall from pressure under Carter Jimmy appointe was who Volcker, Paul Chairman Reserve Federal new the of the Greatworld, into slipped Stagflation. as well as economy, U.S. anymore. hold to seem not did curve Philips unemplo and inflation the between relationship inverse popular The U.S the p and rose 1974-1975, rate unemployment The In decline. output real digits. experienced double reached had inflation “catch-up” the wer controls time the By IV. and III, II, I, Phase as known were s were Nixon by introduced controls price 1973, in hit shock oil the When prolon was wages and prices of freeze ninety-day initial The United andStates 4.2 Japan more plausible explanation points out at the policy mistake of of mistake policy the at out points explanation plausible more outp lowered that curve supply aggregate the in shift adverse an of stagflation the view, this to According 2008). Rudd and Blinder 1982; (Blinder The reversal in the persistent 1970s inflation came only with the m the with only came inflation 1970s persistent the in reversal The s h ol hc ad h pritn ifain onie, n ve suggest view one coincided, inflation persistent the and shock oil the As 105

ged into almost 1000 days, which which days, 1000 almost gedinto ve, which made it more difficultmore it made which ve, e dismantled in April 1974, April in dismantled e too expansionary monetary monetary expansionary too ployment, the great fear of of fear great the ployment, shocks of the 1970s, it is is it 1970s, the of shocks opt for the latter (De Long (De latter the for opt e otpse inflation cost-pushed he eaked at 8.5% in 1975. in 8.5% at eaked t n rie pie. A prices. raised and ut time the policy-makers policy-makers the time yment known as the the as known yment most of the Western the of most umed the office in in office the umed d by the president president the by d onetary tightening tightening onetary policy mistake mistake policy was the result the was till in effect. in till economy . s a link link a s CEU eTD Collection phenomenon. Therefore, the successful disinflation, which cut the inflati the cut which disinflation, successful the Therefore, phenomenon. 3 i 18 t 32 b 18, a t b prl ceie as t hs granting his evenmandaterecession. at combat the to cost inflation of to also credited partly be to has 1983, by 3.2% to 1981 in 13% dol strong the of discussion more detailed a For 65 was inflation that believed campaign, his during problem economic stag made who Reagan, inflation. on war Volcker’s supported 1981, January Reagan, Ronald attacks, continuing Despite Statistics). Labor of (W 10.8% reached unemployment the December in and -1.9% by contracted ba local the than Mafia from money borrow to cheaper was it when history in down go would 1980 that said Buchwald Art Humorist governments. from economy, entire the in felt was money of cost high The (ibid). feder the when 1980 late in only started disinflation deliberate The ( recession the fight to attempt an in again rise to inflation Federal the when 1980 in-mid reversed course the However, rates. ti Volcker dollar, falling as well as inflation, high the tackle King and (Goodfriend 9% was rate inflation average annual the 1979, August rd-egtd ne (rne 19, 293). 1994, (Frankel index trade-weighted perce 59 by appreciated dollar U.S. the 1985, February and 1980 From dollar. appreciatin huge put assets dollar-denominated for demand increased monet the Second, balance. account current the in increase an to leads Chap of results empirical the with line in is development This positive achieved and increase temporary a experienced account capital to led and rose yields high brought that assets denominated eme which economy, U.S. the of developments positive the by underpinned h hg itrs rts a to motn efcs Frt te de the First, effects. important two had rates interest high The

lar and its effect on the trade relations, see belo see relations, thetrade on itseffect and lar 65 106 ute atatvns o te .. olr was dollar U.S. the of attractiveness Further

Goodfriend and King 2005, 3-4). 3-4). 2005, King and Goodfriend ghtened credit and raised interest interest raised and credit ghtened ter 5: the monetary tightening tightening monetary the 5: ter who assumed the office in office the assumed who values in 1980 and 1981. 1981. and 1980 in values nk. In 1982, the real GDP real the 1982, In nk. al funds rate rose to 19% to rose rate funds al g pressures on the U.S. U.S. the on pressures g nlw. h current The inflows. ary tightening and the the and tightening ary oeules o local to homebuilders Reserve allowed the the allowed Reserve a purely monetary monetary purely a on from more than more from on mand for dollar dollar for mand EO, U.S. Bureau U.S. EO, flation the key the flation nt in the Fed’s the in nt rged from the the from rged 2005, 1). To 1). 2005, the political political the w. ste year the as CEU eTD Collection y natnsig72 (E) hogotteetr egntr f 1981 of term Reagan entire the Throughout (WEO). 7.2% astonishing an by been destroyed, including more than a third of its industrial machi industrial its of third a than more including destroyed, been s a by grew GDP real the 1983, in Already stronger. disinflation valueLabor of 8.4 percent (Bureau of Statistics). te his of end the by half one exactly by r 10.8% of unemployment peak 1981 high December The 3.4%. of rate average solid a by grew GDP States becameStates stock terms.a also in net debtor This a current U.S. (BEA).(negative terms flow in debtor net a being to addition USD billion -21.8 of value the reached and negative turned as foreign-owned and abroad assets U.S.-owned between difference inves international net U.S. the when 1986, in came point breaking Further of -3.39% or USD billion 160.7 equaled it when 1987, in low the reached and 1982 in cur Its debtor. net a became creditor, largest world’s the once deve trade these of counterpart financial a As surpluses. trade Japa whereas ballooned, deficit trade U.S. The patterns. financial h mrhn mrn ws etutd ii) Te oto o Asia of control The (ibid). destructed was marine merchant the Japan’s of quarter One xxxviii). 2003, Rickkers and (Takemae causes the popula people 4 percent of – almost rubbles. million Nearly three growth. industrial Japanese of beginning the considered is which Mei the since made had Japan gains the of many out wiped II War was economy Japanese 1945, September 2 on surrender Japanese formal in Powers Allied the of Commander Supreme r the MacArthur, natural Douglas in poor country small relatively a Japan, was creditor The most striking development of the 1980s was the development in wo in development the was 1980s the of development striking most The The country that replaced the United States in its traditional r traditional its in States United the replaced that country The 107

rent account turned into deficit into turned account rent lopments, the United States, States, United the lopments, Major cities were reduced to to reduced were cities Major olid 4.5% and the next year next the and 4.5% olid n started running persistent persistent running started n ne tools, and 82 per cent of of cent per 82 and tools, ne mres ht aa had Japan that markets n ccount deficit), the United United the deficit), ccount sucs We General When esources. tion – died of war-related died of war-related – tion sets in the United States, States, United the in sets ole of the world’s largest world’s the of ole physical structures had had structures physical i etrto o 1868, of Restoration ji in shambles. World shambles. in Japan, accepted the the accepted Japan, rm and reached the reached and rm t fl fo the from fell ate tment position, a position, tment en ta in that means -1989, the real real the -1989, rld trade and trade rld GDP. CEU eTD Collection eoe n grsie iiaypwr gi. h fmu “Peac famous The again. power military aggressive an become prominence in the Meiji era, were disintegrated. disintegrated. were era, Meiji the in prominence 1945, the four largest and six “new” six and largest four the 1945, signific a monopolized that conglomerates industrial and financial ii, 3) Te islto of dissolution The 334). (ibid, percent 61 and banking in percent 50 industry, heavy and machinery mining, teghnd okr’ ihs n a ad eom ht redistribute actualits agricultural valuea 544 of (ibid, fraction former land tenants to at that reform land a and rights workers’ strengthened apostwar foundation modest (ibid). for recovery Japan’ However, industrial heavy its of thirds two (ibid). and structures hydroelectric wealth national the of percent 25 The of (ibid). equivalent percent 30 to wages real and percent 60 to fallen had prewar the of cent per 10 mere a at stood output Industrial gone. dream the lost, was I War World the of beginning the since acquired religion was separated from the state. religion separated was from Rickkers and (Takemae government local and police the the decentralized and Parliament of powers the strengthened rights, human wom fundamental enfranchised also Constitution The 1971).” Oct 4 (TIME people the the of “symbol a than more no became Japan prewar in inviolable” cons who was emperor The theemperor to people. from the was transferred ref democratization also introduced constitution The forces. armed any mai from Japan banned and war renounced 1946, in Japan on imposed constitution economic reforms were anti-monopoly policies. The financial cli financial The policies. anti-monopoly were reforms economic Initially, the Allied policies aimed at demilitarization to e to demilitarization at aimed policies Allied the Initially, h pltcl ieaiain a culd ih cnmc libera economic with coupled was liberalization political The zaibatsu zaibatsu was combined with new labor laws, which which laws, labor new with combined was 108 controlled 49 percent of capital investment in in investment capital of percent 49 controlled

Zaibatsu base remained intact, providing intact, remained base were giant family-controlled family-controlled giant were level, agricultural production production agricultural level, ques, e Clause” (Article 9) of the the of 9) (Article Clause” e nsure that Japan would not would Japan that nsure state and of the unity of unity the of and state of the pan-Asian Empire pan-Asian the of 2 ilo hcae of hectares million 2 d n pr o eooy In economy. of part ant iain Cnrl o the to Central lization. zaibatsu total damage was the the was damage total orms. The sovereignty The orms. 2003, xxxix). Shinto xxxix). 2003, ). idered “sacred and and “sacredidered s rail network, network, rail s n guaranteed en, , which rose to to rose which , aie, and Cabinet, in shipping shipping in ntaining CEU eTD Collection methods and technologies from advanced countries. from andmethods advanced technologies countries. and import through grow to able are followers research, original follower a of that from different is leader technological a of the to related is catch-up expect to reason second The countries. m are capital in increase additional an from gains the capital, Beca growth. productivity fast to lead therefore can capital in productivi their so and capital to access little have countries t is reason One reasons. two for ones developed than faster grow countri developed less theories, growth standard According effect. up ex growth a is typical economies. economic the This industrialized western rat This 43). 1992, (Ito years seven every size its doubling year, U.S. level in 1973, starting from only 25.5 percent of U.S. GDP per cap per GDP U.S. of percent 25.5 only from starting 1973, in level U.S.

The long period of remarkable economic growth started. Thegrowth long of economic started. remarkable period Japanes the rescued Korea in forces Nations United for Japan from purchas American 1950. in out broke which War, Korean the by superseded Howe recession. into economy the plunged and opposition political huge m a still is deflation Dodge the of effect The dollar. per yen 360 f and tightening monetary and fiscal on based was Europe), in Plan (analog Plan Dodge the as known also program, stabilization The 54). 1994, against “bulwark a create to as so expedited be would resources r economic Japan’s that stated which resolution, the adopted Council U.S. the 1948 October In stabilization. economic to democratization and In the process of convergence, the Japanese economy made a made economy Japanese the convergence, of process the In With the deepening of the Cold War, the American policy shifted fr shifted policy American the War, Cold the of deepening the With Between 1950 and 1973 the Japanese economy grew at an average rate rate average an at grew economy Japanese the 1973 and 1950 Between 109

. Whereas a leader must undertake must leader a Whereas . ty is often low. A small increase small A low. often is ty uch smaller in the capital-rich the in smaller uch use of diminishing returns to to returns diminishing of use fact that the growth process process growth the that fact e was roughly twice that of that twice roughly was e atter of debate. It generated generated It debate. of atter e economy from recession. from economy e hat workers in developing in workers hat Communism” (Nishiguchi Communism” elcto o production of replication ixing the exchange rate at rate exchange the ixing leap to 56.7 percent the percent 56.7 to leap ecovery using its own own its using ecovery ita in 1960 (Jorgenson (Jorgenson 1960 in ita s ae oeta to potential a have es ample of the catch- ainl Security National om liberalization liberalization om e, t a soon was it ver, ous to Marshall Marshall to ous of 10 percent a percent 10 of es of supplies supplies of es CEU eTD Collection rdciiy rwh te rdciiy a bten aa ad h United the and Japan between gap productivity the growth, productivity United States, the technological leaders, significa leaders, thetechnological States, United t after decades three the in holds: picture general fa total and labor the of estimates the Although 66 fast the of result a As 1976). Chung and Denison 1980; growth Jorgenson (TFP) and productivity Cummings factor total and labor both as measured product by backed was growth economic remarkable This 1). 2007, Nomura and xot (bd. rud 90 te rs t poiec ad vr h nx dec next the over and prominence to rose steel 1960 Around (ibid). exports represente which clothing, and textiles by dominated were exports early the In value. chain the up swiftly moved exports Japanese Ge West or States United the either than exports manufacturing sha larger a it giving 1983, in 18% over to 1955 in 7% from rose trade world sha Japan’s only, manufactures Taking 200). 2000, (Grimwade 1981 by 7.7% to 1950 export world of share Japanese exports. by played was expansion 90% of that of the USA (Cameron 2005,398).(Cameron USA of the 90% of that re had it 1980 by but level, U.S. the of 50% around was Japan in TFP the 1955, see box 4.1).see box t of explanations alternative (for year one about of lag a with i gain 1% a about to led inventory in reduction 10% each average, on that D and Lieberman 1991, to 1965 from period the over suppliers parts and Japa 52 for data Using costs. carrying associated and inventory of s a “just-in-time,” is example An organization. and management manufactur in workforce skilled and educated highly by also backed was in increase The 22). 1993, Pilar and Ark (van Germany in percent 7.5 and percent 4.2 against Japan, in percent 15 was investment manufacturing ave the 1973 and 1950 Between gap. productivity the narrowing in role y 90, aa eegd s n cnmc oe. motn rl i te p the in role Important power. economic an as emerged Japan 1970s, By

ntly narrowed. narrowed. ntly he World War II the productivity gap between Japan Japan between gap productivity the II War World he ctor productivity may differ based on the method us method the on based differ may productivity ctor 110 66 Initially, capital intensity played an importantInitially, an played intensity capital

he Japanese economic miracle, miracle, economic Japanese he trategy aimed at the reduction the at aimed trategy nese automotive assemblers automotive nese mn (bd. Furthermore, (ibid). rmany d over 40% of the overall overall the of 40% over d postwar period Japanese Japanese period postwar s rose from only 1.3% in in 1.3% only from rose s in the United States United the in emeester (1999) find (1999) emeester ing or innovations in innovations or ing n labor productivity productivity labor n rage growth rate of of rate growth rage (see Christiensen, Christiensen, (see tts hak In shrank. States the productivity productivity the re of the world world the of re ached around around ached ivity growth, ivity d Japan ade oes of rocess and the and ed, the the ed, re of re CEU eTD Collection ot a mre o pouto pa cm coe o en realis being to close came plan production or market war post questionabl is policies bureaucratic of role the However, banks. (MI Industry and Trade International of Ministry the of policies loe hg-eh qimn scos eitn frs lty ref flatly firms consolidate production.” existing sectors, equipment high-tech flooded ma the fragmented makers machinery Japanese restricti Instead, cartels, consolidation. through scale of economies up build to was sought. bureaucracy the what of reverse the pattern a in grew machin the of case in failed policies bureaucratic how documents w policy the negotiate to had bureaucracy Japanese the where consensus-b a broader for argued (1989) Okimoto and (1987) Samuel industries, careful the of product a was miracle economic the that argued (1982) Inc “Japan, nickname the inspired which companies, and government the to out pointed which counter-argument, a was popular Particularly free quite expla an in for searched others 222), provided 1979, (Patrick labor” and commodities opportunities the to responding enterprises and and “actions effor resultperformance of as a interpreted economic the explanations economic neo-classical traditional the to contrast In Alternativeeconomic 4.1: ofBox the Japanese miracle explanations mac by for transport 5% and equipment, whereas clothing fallen the of share had to textiles accounted exports of share 61% 1979, By electronics. consumer a shipbuilding, as such industries, capital-intensive into diversified 111

ith private actors, especially especially actors, private ith MITI’s long-standing desire desire long-standing MITI’s presented in the text, which text, the in presented ed; the machinery industry industry machinery the ed; n o mre ety and entry, market on ons e tool industry: “Not one “Not industry: tool e e. Friedman (1988, 33) 33) (1988, Friedman e. used to coordinate or or coordinate to used the close links between links close the ts of private individuals of ts utomotive industry and and industry utomotive I t pooe infant promote to TI) ly-designed industrial industrial ly-designed .” Whereas Johnson Johnson Whereas .” kt nw entrants new rket: nation elsewhere. nation markets for for markets (ibid). (ibid). ased system, system, ased iey and hinery CEU eTD Collection

ot mr ta te nie tt o Clfri. ewe 18 ad 1990 and 1985 Between California. of state entire the than more worth Im the surrounding land the that estimated was it point certain At t reminiscent was Impressioni for prices record paid buyers Japanese Twenties. optimism The thrived. economy Japanese the 1980s, was recovery the However, 43). 1992, (Ito percent 5 about to fell rate J The red. the into balance trade its pushed imports oil on Japan of prices oil in increase sharp The 1973-74. in shocks oil the with came p first The many). the among 1985 Vogel or 1969 Stone 1967, Hewins 1962, from Japan and tried to draw lessons from its experience (see the s the (see experience its from lessons draw to tried and Japan growth. economic spectacular for phrase catch a become had that tailored specificcircumstances. to explanations historical these of all However, values. cultural Japanese unique emphasized Finally, market. domestic the of development Ja the on so more depended and 1960s late the by GNP of percent 9.6 about only represented defense expenditure high despite even growth fast the experienced Sout of cases by also illustrated be can point This negligible. defens low of effect the growth, high-speed during GNP of percent 30 ex formation where capital Japan, in First, 1975,15-16). these Johnson (see arguments ar There 1976). (Gilpin markets U.S. to access free and expenditure enjoy could umbrella security American the under embraced s the At 1997). (Dees technology and science Japanese to Ja contributions the “jump-start” to helped Americans that is argument The The rapid economic development of Japan was dubbed an “economic mir “economic an dubbed was Japan of development economic rapid The Al the from benefited Japan that argued scholars of group Another 112

st art. The asset market boomed. boomed. market asset The art. st eminal study of the of study eminal Kra n Tia, which Taiwan, and Korea h the benefits of low defense defense low of benefits the perial Palace in Tokyo was Tokyo in Palace perial . Second, Japanese exports Japanese Second, . panese economy through through economy panese e two problems related to to related problems two e Numerous studies praised studies Numerous apanese economic growth economic apanese humanities approaches humanities and an absolute reliance absolute an and hypotheses are ad hoc hoc ad are hypotheses fast. Throughout the Throughout fast. epniue was expenditures e , the land prices in in prices land the , ame time, Japan Japan time, ame aee economy panese lied Occupation. Occupation. lied te Roaring the o acle,” a term term a acle,” Economist roblems ceeded

CEU eTD Collection oua 07. y 04 te ..Jpn rdciiy a epne t 7. percent 79.9 to expanded gap productivity U.S.-Japan the 2004, By 2007). Nomura of end the by counterpart U.S. its with parity achieved productivity unti not was It rise. to continued prices land the 1990, the of beginning protecting losers. The result is the creation of th of creation the is result The losers. protecting hs a b atiue t rpd rdciiy rwh n h IT-indus the in growth productivity rapid to attributed be can This Japane the in slowdown the attributed others Yet 67 4.2).decades the see asset (onboom, prices the of sources box came what experience to about was Japan that suggested nothing December on 916 38 at peaked Nikkei the When (ibid). 1989 December and 1985 also index price stock 225 Nikkei the of value real The too. soared terms real in tripled almost cities largest six Japan’s frontier, it could no longer exploit rapid catch-up effects. The J The effects. catch-up rapid exploit longer no could it frontier, West the approach to started Japan as Furthermore, (WEO). level 2000 i 2010 in then, since slightly rise to started it Although 2009). April when 2004, of exception single a with negative, was prices) consumer a as (measured inflation the 2005 and 1998 Between 2009). Dec 30 Economist, (The Dece its of one-quarter at stood index Nikkei the 2009, December In 2009). perc 1 above just was 2010 to 1990 from rate growth average The deflation. ma wasrecovery the However, down. move to started prices estate be to over.world economy, seemed p and 1985) (Vogel 1” “number as celebrated once Japan, of miracle exporting industries and weak domestic sectors (see sectors domestic weak and industries exporting 90 ad 90 bt t h avne sae f econom of stage advanced the at but 1960s and 1950s The bust was not immediately perceptible. Although the stock m stock the Although perceptible. immediately not was bust The

e „deformed dual economy“, a dysfunctional hybrid o hybrid dysfunctional a economy“, dual „deformed e Katz 1998). 1998). Katz se growth to the industrial policies, which were us were which policies, industrial the to growth se 113

ic development shifted from promoting winners to to winners promoting from shifted development ic Brk 20, ) Te tc market stock The 2). 2009, (Barsky apanese manufacturing sector sector manufacturing apanese rked by anemic growth and growthand anemic by rked the 1990s (Jorgenson and (Jorgenson 1990s the t was 2 percent below its its below percent 2 was t o e nw a to lost two as known be to redicted to dominate the dominate to redicted tripled between January January between tripled re i te U.S. the in tries arket collapsed at the the at collapsed arket l 1991 that the real the that 1991 l it was zero (WEO, (WEO, zero was it r technological ern ent (WEO, April (WEO, ent mber 1989 peak 1989 mber 29, 1989, 29, eful in the in eful (ibid). verage verage 67 f strong strong f The CEU eTD Collection policy, believing that low interest rates would persist for l for persist would ratesinterest low that believingpolicy, in firms to directly lending banks Japanese rise. would prices that companies The 12). 2003, (Posen half than more by expanded portfolios whi 1989, in percent 57 to 1983 in percent 42 from grew portfolio loan banks’ believed that the large Japanese trade surplus could be adjuste be could surplus trade Japanese large the that believed 2003 and Shiratsuka 1999). 2003 and Shiratsuka 1999). m borrow to collateral as it used estate real substantial lending of share The enterprises. medium and small the to attention J response, In there. financing direct the seek to companies large ma securities the of liberalization The 2000). Posen and Mikitani and 2000, Cargill 1999, Kashyapand (Hoshi 1980s the of deregulation financial the xettos f iig ad aus ee uld y nelsi e unrealistic by fueled were values land rising of expectations Some (ibid). 1989 percentin 12 than more to 1983 in lending total of percent 6 Jinushi (see policies fiscal and monetary by demand domestic Japan upon pressure international the to monet attributed typically the of laxity the Japan, In 2000). Siebert 2004, (Hayami 1986-89 in monetary expansionary to boom prices asset the attribute Some 4.2: Box pricesJapanese asset boom force of the BOJ’ (Posen rateforce 2003, 9). the cuts of the before rising already were prices land that is argument probl The 1987. of Agreement Louvre the in again pressure U.S. additional Pla the in first growth domestic stimulate to agreed government Another group of scholars suggests the importance of nonmonetary factor nonmonetary of importance the suggests scholars of group Another 114

ore under the assumption that the land the that assumption the under ore onger period (Okina and Shiratsuka and (Okina onger period Plaza Accord, let alone the full the alone let Accord, Plaza rm h Uie Sae, which States, United the from the real estate sector rose from from rose sector estate real the d through stimulation of the of stimulation through d pcain aot monetary about xpectations policy of the Bank of Japan Japan of Bank the of policy t al.et za Accord, 1985, and after and 1985, Accord, za apanese banks turned their turned banks apanese 00. h Japanese The 2000). o h SE i the in SMEs the to , Hutchison, and Ito and Hutchison, , tended to hold to tended argue that the arguethat kt allowed rkets ary policy is is policy ary m ih this with em s, especially especially s, le the loan the le CEU eTD Collection been in surplus since 1981. During the 1980s, it continued to rise rapidly rise to continued it 1980s, the During 1981. since surplus in been turnaround in his famous March 8, 1983 speech: “In your discussions of the nucl the of discussions your “In speech: 1983 8, March famous his in turnaround détente fore the in turn Reagan’s of result a was latter The spending. inflati for brackets as tax indexed deficit, tax, income budget cut administration U.S. Euro ballooning the by the emphasized was about contraction fiscal concerned the for were need The which Japan, ged o ercae h US dla i rlto to interv the of success the Despite markets. currency relation in dollar U.S. the depreciate to agreed Plaza 1985 in employed partly was strategy This 68 Jap The creditor. net a As to counterpart. financial debtor its had net development economic a rapid The from matured Japan grew, more than 4 percent of GDP in 1986, or $85,9 billion in absolute terms (IF terms absolute in billion $85,9 or 1986, in GDP of percent 4 than more (New York Times, 28 May 1986). (New 28May Times, 1986). York as net with Japan leaving billion, $307.9 to amounted liabilities while for Japanese creditor. largestworld’s the became year,Japan intervene in the foreign exchange market, possibly in combination with aintervene with combination fisca in exchange the possibly foreign in market, t talk to was recommendation policy The 296). 1994, (Frankel automobiles included they sides both on and electronics; consumer and motorcycles, the side import the on equipment; transportation other and aircraft agri particularly included side export the wor on industries the suffering of rest the to relative products U.S. of competitiveness fast the of result a As deficit. trade the induced way this and ab dollar pushed which bubble”, “speculative irrational anby driven exchange foreign the that argued (1985) Cooper and (1985) Krugman dollar. balanc trade deteriorating the associated Some Washington. in as Raa dcdd o ae sad gis te oit no. e advocated He Union. Soviet the against stand a take to decided Reagan , How to deal with the imbalance was a matter of heated debate among scientists debate heated of a matter was the imbalance with How deal to

entions, the U.S. trade deficit did not significant not did deficit trade U.S. the entions, h Jpns yn n Gra Mr b itreig in intervening by Mark German and yen Japanese the Accord, by which governments of the major trading n trading major the of governments which by Accord, 115

eign assets totaled $437.7 billion, $437.7 totaled assets eign ign policy. After a decade of of decade a After policy. ign n n icesd h defense the increased and on dollar appreciation, the price price the appreciation, dollar culture, capital goods, and and goods, capital culture, ns cret con has account current anese ove “fundamental”levels,ove y included textiles, steel, textiles, included y ld decreased. The most most The decreased. ld wt te appreciating the with e sets of $129.8 billion $129.8 of sets semiconductors and semiconductors , reaching a peak of of peak a reaching , pean countries and and countries pean Japanese economy economy Japanese he dollar down or down dollar he market had been been had market l contraction.l S) . h Reagan the In the same same the In ly decrease. decrease. ly ear freeze freeze ear as well ations ations the the the 68

CEU eTD Collection period of 1980-85, the trade balance movements were the result of U.S. U.S. of result the were movements balance trade the 1980-85, of period proposals, I urge you to beware the temptation of pride, the tem the pride, of temptation the beware to you urge I proposals, balance. de trade the and fiscal the between correlation the to out points over investment and (2) a fiscal contraction. The results of his mode his of results The contraction. fiscal a (2) and investment over dome of excess a correspond large (1) to the 1980s in current account the Japanese a He surplus. trade Japanese the of determinants the examining at arrives (1988) Ueda 1985. late since yen the vis-à-vis dollar the exp not does model the However, 1980. since movements rate exchange the of U the of movements balance trade the of most for account can 1980s developing non-oil the to lending in cutoff the and Japan in deficits Uni the in deficits fiscal higher sharply of combination a that Thei model. simulation macroeconomic a through 1980s the in imbalances

5.1% of GDP in 1985, before it returned to 3.1% of GDP at the end of his term in 1988. GDP in at5.1% the end of 3.1% returned 1985, before to GDP of in of term it his t office the assumed Reagan when 1981 in GDP of 2.6% from rose deficit these of result a As undated). House, (White terms Reagan two during increase percent 35 a into translated rhetoric This evil.” and good and call simply be to struggle the from empire, yourself remove thereby and evil misunderstanding an of impulses aggressive the fault, at equally sides both label and all it above yourselves aa t te ntd tts cue te olr prcain n wor and appreciation dollar the caused States, United the to Japan ra Japanese to relative rates and interest U.S. raised contraction expansion fiscal U.S. The rates. interest in changes the through Sachs and Roubini (1987) examine the determinants of the global t global the of determinants the examine (1987) Roubini and Sachs defic twin the in support its found contraction fiscal for call The 116

tes, induced a capital inflow from inflow capital a induced tes, to ignore the facts of history and and history of facts the ignore to ted States and sharply reduced sharply and States ted rgues that the movements in movements the that rgues ptation of blithely declaring blithely of ptation ficit. The two are linked linked are two The ficit. h am rc a giant a race arms the a similar conclusion by by conclusion similar a l suggest that during the the during that suggest l .S. and Japan, and some and Japan, and .S. in the defense spending defense the in we rgt n wrong and right tween countries in the early early the in countries sened the U.S. trade trade U.S. the sened economic expansion, economic policies, the budget the policies, h Jpns fiscal Japanese the t ruet which argument, it o the record low of low record the o rade and financial financial and rade r results suggest suggest results r lain the drop indrop the lain stic savings savings stic CEU eTD Collection point for industrialized countries. However, although the twin deficit deficit twin the although However, countries. industrialized for point 1984. This This the was policy donothing. to recommendation investme best the with economy the to Accordin flew capital weakness.”international Japanese and strength U.S. of sign a – reverse J than U.S. the in invest to attractive more it find Japanese the a strength Japanese of sign a as regarded is “it (1988), t Friedman position the stands above, mys presented a theories is “It the strength. to economic U.S. contrast of In result the was deficit oraccompanied experience duri Japan’s the theby latebudget in surplus 1990s the explain to fails it 1980s, the in experience U.S. the capture (1984). Feldstein to refer policy, economic cla the see policy, trade the of overview an For 69 bala account current the raises balance budget the in increase a Deficit” “Twin the with consistent are findings empirical other the and 1980s the in oi one episodes, account current U.S. two examines in decrease sharp the by dominated was behavior account current government Japanese in decrease the and price oil in decreases dollar strong the that responded Regan and Reagan 1983, May G-7 in the Virginia of state of heads the of meeting the in rates interest a deficit budget America’s about Reagan to complained Europeans chang regulatory and cuts tax Reagan the by created climate of result the were deficit trade and appreciation, dollar inflow, “safe-haven” the to subscribed Treasury, the of Secretary ec market the with interference less and taxes lower government, 69 It was in line with the so-called Reaganomics, which was based was which Reaganomics, so-called the with line in was It laissez-faire tiue rvie drn te is Raa amnsrto, 1981- administration, Reagan first the during prevailed attitude

ssic work by Destler (2005). For an overview of the of overview an For (2005). Destler by work ssic 117

rgument. A one percentage point point percentage one A rgument. es (Frankel 1994, 298). When the When 298). 1994, (Frankel es iw ht h pten f capital of pattern the that view apan. Surely it is precisely the the precisely is it Surely apan. ey o e h, sy Milton says why,” me to tery expenditures. In 1986-87 the the 1986-87 In expenditures. nce by 0.10-0.49 percentage percentage 0.10-0.49 by nce U.S. current account deficit deficit account current U.S. nd American weakness that that weakness American nd nt opportunities. Therefore, opportunities. nt onre a Williamsburg, at countries the favorable investment investment favorable the nd its effects such as high as such effects its nd onomy. Donald Regan, Regan, Donald onomy. hypothesis seems to to seems hypothesis on scaling down the down scaling on pie. t (2009) Ito prices. l t ti ve, the view, this to g hat the U.S. trade trade U.S. the hat in the 2000s. His His 2000s. the in ng the 1990s. ng 1990s. the n US trade U.S. and American American CEU eTD Collection Senator Donald Reigle in 1983 (cited in McGee and Yeomin 1996, 2). 1983(cited Yeomin 1996, 2).Senator McGee in and Donald Reigle in im Japanese of flood the to door America’s close to come has time anot is industries basic our on attack Japanese continuing “The 631). rece past the from recovered fully not had still companies some mid the Belt”in “Rust industrial the in (especially regions t Pressures rhetoric. protectionist the of the growth the by to matched imports the of growth The Congress. the from came Treasury exchange rates and pressures on opening of foreign markets to U.S. exports. exchange markets exports. and U.S. rates to pressures onopening of foreign administrat the Congress, the in pressure protectionist the with reduc to order In 1981. in was it what times four nearly 1985, in record olr a bgn o eln i Fbur 18 bt h codntd intervent coordinated the but 1985 February in decline to begun had dollar t currencies major against 5% about fell dollar U.S. the that such dol private of volume the morning, Monday on opened markets exchange the fleei money more still prevent to rates interest high keeping on woul and economies their of out capital investment pull not would dollar Europe the deficit, trade growing the tackle to tried States Oc 7 (TIME desirable is dollar ap the against currencies nondollar “orderly that agreed five the Accord, Plaza the With markets. t in interventions through dollar the depreciate to campaign a announced Japa Germany, West France, with together administration Reagan Frankel and (Putnam Bayne 1994,298). expansion 179,cited in 1987, high to due not were case, any in and, problems not were deficits The shift in the government policy came when the trade deficit w deficit trade the when came policy government the in shift The n 2 etme 18, fe a etn a te lz Htl n N in Hotel Plaza the at meeting a after 1985, September 22 On h mi opsto t te o-nevnins attd o te ht Ho White the of attitude non-interventionist the to opposition main The 118

-Atlantic and Midwest states, where states, Midwest and -Atlantic n Jpn oe ta a weaker a that hoped Japan and ion moved towards activism on activism towards moved ion ng to the United States. When When States. United the to ng ssion) rose (Richardson 1994, (Richardson rose ssion) t 1985).” Whereas the United United the Whereas 1985).” t o protect U.S. industries and industries U.S. protect o n and the United Kingdom Kingdom United the and n hat day (ibid). In fact, the the fact, In (ibid). day hat ported products,” stated stated products,” ported interest rates and fiscal fiscal and rates interest preciation of the main main the of preciation her Pearl Harbor. The The Harbor. Pearl her e the deficit and deal deal and deficit the e he foreign exchange exchange foreign he as heading to a new a to heading as d ease the pressure pressure the ease d ew York City, the the City, York ew ntd tts was States United ions helped to to helped ions a sls was sells lar s ad the and use CEU eTD Collection practices was consistent with free trade. “I will not stand andby not wat will free with “Iconsistent trade. practices was that persuaded was free-trader, committed a Reagan, practices. rtcins sniet o Cnrs. h ug o Cptl il t Hill Capitol on urge The Congress. of sentiments protectionist bought few American icons like Columbia Pictures or Rockefeller Columbia like bought Centre. American few icons redouble its efforts to become more competitive: “T morecompetitive: become to itsefforts redouble Lieberma Joseph Senator Democratic Connecticut's 72 ex 1988 of waso and renewed in 1997 expired again It Clinton. Act Competitiveness and Trade Omnibus 71 Frankel (1993). and by Dominguez documented intervention of effect significant Statistically 70 yen.the against especially decline, this sustain investment in the United States, which generated a large publi large a generated which States, United the in investment

dollar depreciation, the hoped for reduction in the trade deficit did not happen.trade not did fordollar the deficit in depreciation, the reduction hoped Oct 6 (TIME, months 18 within currencies major other against 30% some foreign exports. com companies U.S. help to Treasury from subsidy export million C the appease To trade. international the diminish that measures time, same the At 1985). Oct 7 (TIME Accord Plaza the following Reaga rules,” the by play not do nations other because jobs their 8). 1990 in expired law the before list the from removed were Japan trad unfair 301 Super the on appeared which of each Japan, and India origi The changes. fundamental no made law the However, traders.” theref were who States, United the with surpluses trade highest targete It 1988. of Act Competitiveness and Trade Omnibus initiated t be to were policies trade unfair perceived The overwhelming. 71 Further frictions between Japan and the United States were fue were States United the and Japan between frictions Further h scn cag i te rd blne oiy a te .. ca U.S. the was policy balance trade the in change second The But neither the dollar depreciation, nor the calls for fair trade fair for calls the nor depreciation, dollar the neither But

o ecag rts n h ps-lz Acr period Accord post-Plaza the in rates exchange on s his year when they turn on the lights of that Chris that of lights the on turn they when year his nce more by Clinton in 1999. 1999. in Clinton by more nce 119 ctd h tascin s vdne ht h US m U.S. the that evidence as transaction the cited n 70

From the February peak, the dollar fell by fell dollar the peak, February the From ie i 19 ad a nt eee utl 94 by 1994 until renewed not was and 1991 in pired c stir, especially after Japanese after especially stir, c the prosecution of unfair trade trade unfair of prosecution the ackled by the congressionally congressionally the by ackled ongress, he proposed a $300 a proposed he ongress, ch American workers lose workers lose ch American n announced on Monday Monday on announced n led by the rising Japanese rising the by led ore identified as “unfair “unfair as identified ore (Mcgee and Yoon 1996, Yoon and (Mcgee e list but both Brazil and Brazil both but list e managed to decrease the the decrease to managed ee gis subsidized against pete nal targets were Brazil, were targets nal e ad e ol veto would he said he o do something was was something do o cutis running countries d 72 ll for the fair trade trade fair the for ll 1986). Despite the Despite 1986).

tmas tree in in tree tmas was ust CEU eTD Collection con deficit.account First surge. this of explanations competing several are There that means surplus account current a running was Japan that fact the (Kähkönen 1980s in receiving1997, 27). 40 percent over FDI, Japanese of thirds two over absorbed which countries, industrial countries developing of share The too. changed capital the of destination tr finance, as such sectors, tertiary the to manufacturing from diversif geographical to integration capital vertical from moved of investment exporter largest world’s the been has Japan 1980s, Wakasug and (Komiya investment direct of year) first very (the and 1973 the Japanese FDI rose fivefold (ibid, 27). The year 1972 was 1972 year The 27). (ibid, fivefold rose FDI Japanese the 1973 and shock. y The reserves. exchange foreign its increase Or 74 (1991). Froot and investme foreign Japanese the of overview an For 73 prope Japanese on occurring isactually celebration have to going are Americans we Center, Rockefeller finan external for need the in those i.e. deficit, account current c the to transferred was home, at spend not did and growth and exports the world in marketsexports developed. distributing in investment downstream Later, countries. Asian nearby of manufacturing labor-intensive and Japan, in manufacturing supply vert the of m form raw in investment the upstream into directed took was It integration. investment the of Most 27). 1997, (Kähkönen countries thirds two almost 1970s, the Until payments. of balance weak the of regula government stringent to due part in scale, small a on conducted aa’ frin iet netet ea i te al 1950s. early the in began investment direct foreign Japan’s In the 1970s, Japan’s foreign investment started to grow significant grow to started investment foreign Japan’s 1970s, the In 74 hs en ta te aia srls wih aa acmltd thr accumulated Japan which surplus, capital the that means This rty (Time, 13 Nov 1989).” Nov 13 rty(Time, en was permitted to fluctuate more widely since the since widely more fluctuate to permitted was en 120 nt, see Komiya and Wakasugi (1991); Kähkönen (1997) Kähkönen (1991); Wakasugi and Komiya see nt, to come to grips with the reality that this great n great this that reality the with grips to come to

aterials, especially mining, to mining, especially aterials, npr ad el sae The estate. real and ansport i 1991, 51).” Since the early the Since 51).” 1991, i cing. However, whereas the the whereas However, cing. it had to run an equal capital capital equal an run to had it Te opsto o the of composition The . and foremost, the simple simple the foremost, and ication. It changed away away changed It ication. networks to help place place help to networks intermediate goods in in goods intermediate tions imposed because imposed tions with the United States United the with dubbed “the “the dubbed 73 ountries running the the running ountries et o developing to went oee, t was it However, shrank in favor of favor in shrank ly. Between 1971 1971 Between ly. gannen first oil oil first ational ational ough ical ;

CEU eTD Collection ofdirect the flows. portfolio instead investment outflows capital the why explain to account into taken be must 1991). Froot (see investment portfolio the in not and investment direct fails it exports, capital the explains surplus account current Japanese FDI in 1986-90 (ibid). Japanese 1986-90 FDI in percent 31 for account to came insurance and finance in FDI event, the a invest to free became firms insurance and financial revision De in laws exchange foreign of revision the before FDI undertake to servi and commerce manufacturing, in enterprises Japanese Although me and small by FDI and countries developing in FDI for revised funds. investment foreign on rates lowered Bank Export-Import Japan betw it promote to policies first introduced and FDI e on regulations Japan surplus, large a into turned account current Japanese the When the liquidity Japanese investors. of the appreciation yen a Thus, 1991). Stein and (Froot currencies depreciated result, wi a compared investments new finance As to assets collateralize investors. Japanese of assets of dollar-value the y The (ibid). 1988 late and 1985 of fall the between terms effective appreciated yen The appreciation. yen the was influenced been have licensing or exports. licensingexports. or investment overseas through advantages these on rents the internalize m which assets, intangible firm-specific some of existence A possible factor to explain the initial spurt was the lib the was spurt initial the explain to factor possible A nte mcocnmc hne truh hc te oeg drc investme direct foreign the which through channel macroeconomic Another Alternative explanations are based on industrial-organization view industrial-organization on based are explanations Alternative 121

ake it more profitable for a firm to firm a for profitable more it ake to explain the surge in the foreign the in surge the explain to th competitors in countries with with countries in competitors th broad (Kähkönen 1997, 31). In 31). 1997, (Kähkönen broad eralization of capital controls. capital of eralization took the form of the foreign foreign the of form the took en appreciation increased appreciation en hy ol mr easily more could they een 1969 and 1972. The The 1972. and 1969 een imszd enterprises. dium-sized ces were generally free generally were ces cember 1980, after the after 1980, cember y 2 ecn i real in percent 42 by rte ta through than rather , Tax provisions were provisions Tax led to an increase in in increase an to led hs ohr factors other Thus, , which emphasize which , of the increase in in increase the of ased government government ased t might nt CEU eTD Collection barriers. If a firm faces an increase in the protectionism the in increase an faces firm a If barriers. ewe Jpn n te ntd tts Frhroe i i supported is it Furthermore, States. United the and Japan between by domestic macroeconomic conditions and increasing use of antidumping of use increasing and conditions macroeconomic domestic by o size the exceeded have flows capital Portfolio 75 infcn dfeec. hra te uwr FI hav FDI outward the Whereas difference. significant opportunities. the all investment additional explore dome the enable could protection However, goods. those of production the in a domestic the both for profitable more it makes protection to due t goods, identical produce firm domestic a and foreign a If 20). 1991, Froot produce that firms for only sensible is explanation this However, the transferring by problem the solves it country, certain a level of anti-dumping actions initiated in the Farrell 1990s. in initiated level of actions anti-dumping me protection trade by influenced significantly was investment Bar costs, labor relative and size market for Controlling studies. suppor is argument The investments. “greenfield” toward skewed was J the Second, goods. differentiated and complex were products Japanese host countries.host manufacturing industries and 15 countries and find that Japanese FD Japanese that find and countries 15 and industries manufacturing early 1990s, there was a contraction in foreign lending, both long-term and short-tcontraction long-term both andearly foreigna in was there 1990s, lending, bub the After 47). 1991, Krugman and (Graham abroad investing firms w this collateral, the in increase an into translated price land ex an in rise the to Similar boom. price asset an experienced oprbe nad n otad otoi fos Japa flows. portfolio outward and inward comparable A more subtle argument is related to the FDI as a means of means a as FDI the to related is argument subtle more A This explanation fits well the 1980s, which were the period of the the of period the were which 1980s, the well fits explanation This h FI umntd n h scn hl o te 90, hn h Jpns ec Japanese the when 1980s, the of half second the in culminated FDI The

122 ecee te ie f h iwr FI tee ae b have there FDI, inward the of size the exceeded e te oeg drc ivsmn. oee, hr is there However, investment. direct foreign the f ee otoi fos o lre xet nld debt include extent large a to flows portfolio nese

and is unable to export its products to products its export to unable is and entire production to that country. that to production entire et al. ay acting as a subsidy to Japanese Japanese to subsidy a as acting ay change rate, the increase in the the in increase the rate, change asures, and in particular by the the by particular in and asures, rell and Pain (1999) find that find (1999) Pain and rell (2004) use a panel data for 8 for data a 8 panel use (2004) differentiated products (see products differentiated nd the foreign firm to invest to foreignfirm the nd I was primarily affected affected primarily was I circumventing the trade trade the circumventing ted also by econometric econometric by also ted by two facts. First, First, facts. two by ble burst out in the in out burst ble apanese investment investment apanese investigations by by investigations he price increase price he rd frictions trade erm. stic firm to to firm stic 75 onomy onomy

one one een een

CEU eTD Collection rpsd prhs o 8% f arhl, ak hn US lae i leader U.S. a then back Fairchild, of 80% of purchase a proposed rpsl a wtrddw. ial, h Cnrs eatd h Ex the enacted Congress the Finally, watered-down. was proposal investment, direct foreign toward policy OnU.S. 76 2 Nov 18 China(Bloomberg, by wassurpassed it when b the was Japan treasuries. U.S. mostly securities, However, the Congressional concernexpandingHowever, remained. over presence the foreign Congressional market semiconductor entire the of takeover Japanese potential the poli was case The Schlumberger. parent, French the from industry, case Fairchild-Fujitsu a was there Second, price. inflated an bought Goodyear unless takeover a threatened and stock Goodyear of 11% Hanson group investment the and Goldsmith James financier British direct investment.direct the in role central a played cases Two Congress. the in outbursts eeae te eiw rcs o te oeg ivsmn t te C the to investment (CFIUS). States Investment the United in foreign the of process review the delegated national the to threat poses that investment block may President t According 1988. of Act Competitiveness and Trade Omnibus the under the unless Act Trade 1988 the veto would he that said and investment climate a create would Amendment Exon-Florio that feared Reagan representat and Exon secur James J. Senator by made were commerce national threatens that investment foreign limit to proposal authority The investment. direct foreign incoming of regulation the Msahl 07. h Peiet ok cin n n cs, n, n ie other five in t and, case, one fifteen in action of took President investigations The 2007). conducted (Mostaghel CFIUS and notifications voluntary h rsn frin iet netet nte ntd tts e to led States United the in investment direct foreign rising The Partly in response to Goodyear and Fairchild controversies, Congres controversies, Fairchild and Goodyear to response in Partly rm 98 hog 19, FU rvee vr fw rnatos tee wer there transactions: few very reviewed CFIUS 1994, through 1988 From 76 First, there was a greenmail attack on Goodyear, the tire com tire the Goodyear, on attack greenmail a was there First, iggest foreign holder of U.S. Treasuries until Sept until Treasuries U.S. of holder foreign iggest see Graham and Krugman (1995, Chapter 6). 6). Chapter (1995, Krugman and Graham see 123 008). 008).

ive James J. Florio. President Florio. J. James ive n 97 Jpns Fujitsu Japanese 1987. in U.S. policy on the foreign foreign the on policy U.S. security. President Reagan President security. that would hinder foreign foreign hinder would that ticized as an example of example an as ticized t o ncsay U.S. necessary or ity nFoi Amendment on-Florio mite n Foreign on ommittee in 1986. They bought bought They 1986. in Fjtu akd off. backed Fujitsu . t gat President grant to s several protectionist several n the semiconductor semiconductor the n original Exon-Florio Exon-Florio original o the Amendment, the o back its shares at shares its back s began debating began s pany, by the by pany, cases, the the cases, ransactions ransactions ember 2008, 2008, ember e 918 918 e

CEU eTD Collection tryin by technology for purposes. military used regulations control export violated previously have may wer concerns security national that appears it confidential, are CFI the Although 2007). (Mostaghel Company U.S. a Inc., Holdings Aircraft MAMCO sell would it announced CATIC 1990, August In months. three within divest to CATIC ordered Bush George President report, CFIUS a May in However, 1988. November in concluded was transaction The Seattle. p Inc.,aircraft an Manufacturing of MAMCO purchase a which proposed g Chinese a (CATIC), Corporation Export and Import Aero-Technology case the was transaction a unwind or block to intervened formally case, only The (ibid). offers investment their withdrew companies pnoe aece wr poiie fo aqiig S ees cont information a unless granted waiver is of the Defense. by Secretary defense US acquiring from prohibited were agencies sponsored foreig or governments foreign amendment, the to According 1993. in effect which Exon-Florio, to wentamendment “Byrd” case the led to withdrewThomson The it. li was bid the that Recognizing government. foreign the by acquired se the that fear the hence France, in contractor military major The government. French the by defens owned was Thomson of large 60% approximately a was bankruptcy, in although LTV, politicized. was O Division. Missile Corporations’ LTV of 1992 in acquisition attempted the Reagan, Clinton and both Bush administrations said: “The commi “The said: administrations Bush both and Clinton Reagan, the low-le fairly a at operated CFIUS The liberal. remained n motn cs ta ld o ao aedet t Eo-lro was Exon-Florio to amendments major to led that case important An ept tee hne, h US plc twr icmn frin dir foreign incoming toward policy U.S. the changes, these Despite 124

vel. Richard Perle, who worked for worked who Perle, Richard vel. e related to the purchaser, who who purchaser, the to related e stv ifrain ih be might information nsitive its interest in MAMCO MAMCO in interest its of the China National National China the of n hc te President the which in ttee almost never met, met, never almost ttee g to obtain sensitive sensitive obtain to g cnrco. Second, contractor. e arts maker located in in makerarts located kely to be blocked, blocked, be to kely ractors or sensitive sensitive or ractors nce again, the case the again, nce overnment agency, agency, overnment 1990, based on on based 1990, US proceedings proceedings US company was a was company c investment ect n government government n Thomson’s Thomson’s to DeCrane to into into CEU eTD Collection aac ahee a igepstv vle ic 18. oee, h mod the However, 1982. since value positive single a achieved balance billion in 1990:3 to $6632 billion in 1991:4 and passed its previous peak in 1992:1 (H 1992:1 in peak previous its passed and 1991:4 in billion $6632 to 1990:3 in billion labor productivity jumped from about 1.5 percent during the two decades two the during percent 1.5 about from jumped productivity labor Febof News, a joke (CBS 22 2006).” bureau low fairly a at usually was it deliberated it when and enjoyed its “unipolar moment (Krauthammer 1990, 2002).” 2002).” (Krauthammer enjoyed 1990, “unipolar its moment Soviet the of collapse the After deflation. with struggled Japan turn growth economic miraculous The 1980s. the of Japan from different Japan won,” Japan over; is war cold “The saying when War Cold the of opinion popular the captured Tsongas Paul Senator Although 1990s. the U.S. current account deficit due to the brief 1990-1991 recession. In 1991, the c the In1991, recession. 1990-1991 brief the to due deficit current account U.S. 2003, 8). However, was the recovery sluggish. 1996$) (in GDP real shallow; and brief relatively was recession The 5). 2003, (Hester 1990:4 until 8% above stayed and 1989:2 in 9.73% to 1987:1 in 6.22% feder nominal the response, In failures. bank of wave a saw 1989 and p was panic financial The resort. last of lender the as act to ma the to liquidity supplied FederalIn the Reserve response, 1929. than of that the 22.61%, unprecedented an by dropped Average Industrial Jones Dow The other after States United the hitting zones, time international westw spread and Kong Hong in began crash The crashed. world the around t 1987, 19, October On 1987. of Monday Black the in roots its had recession U.S the from transfers unilateral large by caused mostly was The protectionist pressures slightly eased in the light of the of light the in eased slightly pressures protectionist The Further easing of the protectionist pressures came with a t a with came pressures protectionist the of easing Further h eooi stain tre t cag i te eod af f h 1990s the of half second the in change to started situation economic The 125

revented but the economy slowed slowed economy the but revented cratic level. (…) I think it’s a bit bit a it’s think I (…) level. cratic markets had already declined. declined. already had markets . allies in the Gulf War. The The War. Gulf the in allies . Union, the United States States United the Union, el rm ek f $6732 of peak a from fell emporary reduction in the in reduction emporary political developments of developments political al funds rate rose from rose rate funds al of the 1990s was quite quite was 1990s the of ed into sluggish and sluggish into ed est surplus of 1991 1991 of surplus est preceding 1995 to to 1995 preceding excessive cost of cost excessive he stock markets stock he rket and agreed agreed and rket collapse larger larger collapse urrent account account urrent ards through through ards . The U.S. The . ester ester CEU eTD Collection ose eut pie, oshl wat ad ecie ln-u icm. As income. long-run perceived and wealth household prices, equity boosted mus to began which deficit, trade the toward neglect benign proportions as their average portfolio. Since the a the Since portfolio. average their as proportions the keep to decided largely investors U.S. returns, wealt their to returns large very enjoyed investors betwe link following the suggests 7) (2001, Ventura of import the that view the is this to Contrary 77 performance decades. economic best the exhibited States United the 2000, and t contributed Be remained the low. inflation and rate reduced surpluses. The was unemployment revenues tax the in increase resulting the and growth prod fast The 1990s. the of halves second and first the between growth ste percentage 1 the of two-thirds about for accounted computers of technolog information of use the that estimate (2000) Sichel and Oliner Si and Oliner 2003, al. et IT Basu 2001, produced Stiroh 2007, either al. et that (Jorgensen intensively industries the to traced be could and IT-led producti The 2005). (Ferguson then since period the in percent 3 roughly factors helped to widen the currentfactors deficit. account widen to the helped pe this from it at Looking declined. rate savings and rose consumption Finall investment. domestic in rise a to also led return ofrates the boosted that inflows capital generating thereby investments, perc boosted it First, consequences. several had productivity the t observed, (2005) Ferguson As 203). 2002, Eichengreen and (DeLong world the place attractive more a States United the made which growth, rapid the reflected deficit trade the Administration, the to

Hence the large current account deficits.” The prob The deficits.” account current large the cou Hence it that so more, itself leveraged States United current account widening after the stock prices col theprices stock after widening account current h rsn poutvt eald h Citn diitain o sustai to Administration Clinton the enabled productivity rising The

h in the form of asset price revaluation. Rather th Rather revaluation. price asset of form the hin lapsed. lapsed. verage portfolio is short in foreign assets, this m this assets, foreign in short is portfolio verage the capital was to a certain extent driven by an as an by driven extent certain a to was capital the m and buy domestic and foreign assets roughly in th in roughly assets foreign and domestic buy and m d net n oetc ses eod h ices in increase the beyond assets domestic in invest ld lem of this explanation is that it fails to explain to fails it that is explanation this of lem en the bubble and the current account: “In the 1990 the “In account: current the and bubble the en 126

77

productivity growth and economic and growth productivity hroom again in 1993. According 1993. in again hroom y, expectations of higher returns returns higher of y,expectations to invest relative to the rest of of rest the to relative invest to eived rates of return on U.S. U.S. on return of rates eived olr Scn, h higher the Second, dollar. sotlvd budget short-lived o p-up in productivity productivity in p-up y and the production the and y vity resurgence was resurgence vity uctivity and output output and uctivity rspective, all these these all rspective, or used IT most most IT used or f h ps three past the of a otr of posture a n an spend these spend an tween 1993 tween hl 2000). chel he surge in in surge he eans that the the that eans the further further the set bubble. set result, a wealth. wealth. e same same e s U.S. s CEU eTD Collection performing sector of the 2000s. According to the to According 2000s. the of sector performing burst on March 10, 2000, when the NASDAQ Composite index peaked at 5048.62, more t more 5048.62, at peaked index Composite NASDAQ the when 2000, 10, March on burst Numerically 2-3). 2005, Ventura and (Kraay 2000 and 1995 between year per i to apparent be to seem not did sector their in winner a become browser, went public on August 9, 1995, its stock shot from $28 to $58.25 per share at the end from $58.25 end pershot $28to August at share the stock browser, 9,1995,its on public went b a for known companycomputer Inc.,US a NetscapeCommunications, n tc fn o Dcme 3, 99 i wud ae en ot ol ₤4 o aeae a average on 19Dec decade(Financial 2009). later Times, ₤448 only worth been have would it 1999, 31, December on fund tech a in double its value a year before. Mostly due to the dot-com cras dot-com the to due Mostly before. year a value its double

attention was drawn to internet-based companies, commonly referred commonly companies, internet-based to drawn was attention as DELL such companies, and software computer hardware the traditional to IT-compa of popularity the IT, in investment massive firms’ equity prices accelerated from 10.4 percent per year betwee year per percent 10.4 from accelerated prices equity five-fol nearly increased prices equity U.S. mid-2000, in peak the abl being company one only of problem The 2000). July 27 Today, (USA 2000 30, t during add an for apiece million $2 least at paid companies com t of height the At campaigns. awareness brand the through sector capturethe to order today in loss net a operating on basedwas b Their mushroomed. dot-coms of number The market. stock soaring the capita venture the 1998, in fall to began rates interest the As 1990s. came frenzy real the However, 2). 2006, Magin and (DeLong day the of

With the accelerating decline in prices of IT-related equipm IT-related of prices in decline accelerating the With 127

Financial Times Financial n 1990 and 1995, to 21.2 percent 21.2 to 1995, and 1990 n nies started to grow. In addition addition In grow. to started nies market share in their respectivetheir in share market h, technology was the worst the was technology h, nvestors. Between 1990 and and 1990 Between nvestors. , if you had invested ₤1000 ₤1000 invested had you if , he Super Bowl On January January On Bowl Super he he dot-com boom, 17 dot- 17 boom, dot-com he lists saw an opportunity in in opportunity an saw lists d, and the growth rate of of rate growth the and d, ent in the late 1990s and 1990s late the in ent to as to ack-then popular web web popular ack-then by the end of the the of end the by snse strategy usinesses or Microsoft, the the or Microsoft, dot-coms , the bubble bubble the , . When When . e to to e han

CEU eTD Collection began to change by the end of the 1980s, partly because of market-or of partlybecause 1980s, the of end the bychange to began per dollar, when foreign economists expected the devaluation of around around of devaluation the expected economists foreign when dollar, per ruling the of assassination and 1994 January in Chiapas of g province a instability: political the by coupled were problems successful institutional and financial stabilization. andsuccessful financial stabilization. institutional eco of showcase a was Mexico 1990s, the of beginning the In Mexico. followe was Chile in reform neoliberal The again. America Latin Ca elsewhere. yield higher a for looking investors made which Japan, interest low the of because partly countries, American Latin market capital international the to access denied and stagnation LatinEast As America in geographically and1997. Theconcentrated was lending developing the to inflows capital the of episode major second the the at world the swept that crises financial of series the official 15 percent devaluation of the Mexican peso in December in peso Mexican the of devaluation percent 15 official effect an into turned situation The 2). 1996, (Whitt reserves in billion $11 weeks, four about In down. running were reserves exchange foreign the la a centralb the As depreciate. to started Peso assets. Mexican placing started investors result, a As 23. March on candidate overva was peso Mexican that worry observers many led This p 7 approximately or 1993, in billion $20 than more to 1989 in billion $6 from World Developing 4.3 h 18s n h Ltn mrcn onre wr te Ls Dcd” m Decade” “Lost the were countries American Latin the in 1980s The h mi Mxcn rbe ws h hg cret con deficit account current high the was problem Mexican main The The stock market boom was probably partly fueled also by the by also fueled partly probably was boom market stock The 128

end of the 1990s. These crises ended ended crises These 1990s. the of end ank was trying to maintain the peg, the maintain to trying was ank eil rblin n h southern the in rebellion uerilla ae i te ntd tts and States United the in rates countries between 1988 and 1988 between countries lued. The macroeconomic macroeconomic The lued. s. However, the situation situation the However, s. 1994, to about four pesos pesos four about to 1994, iented reforms in several in reforms iented b smlr fot in efforts similar by d funds repatriated after repatriated funds gr ik rmu on premium risk rger pital began to flow to to flow to began pital party’s presidential presidential party’s Mexico lost nearly lost Mexico nomic reform and and reform nomic wih ballooned which , ive crisis with the with crisis ive 20 percent (see (see percent 20 ercent of GNP. of ercent ia. ia. arked by by arked CEU eTD Collection rvlg fr h Erpa-ete rgos wt te oe exc sole the with regions, European-settled the for privilege known as “Asian economic miracle.” economic “Asian as known hig their significa experienced which of region, second the because was Asia inflows East capital the attracted countries IMF, fromBIS the Bank Canada. and the of la of lender the as acted thus States United The Congress. through thr provided pass to failed Clinton wasPresident as Fund Stabilization Exchange help U.S. The States. United the by orchestrated l events and crisis Asian the of anoverview For 79 a reserves gross down ran government the onlyafter the However, it. to aspect panic self-fulfilling a challenged is hypotheses disequilibria real This 78 Dornbusch yearsyears ten and elevenfrom then just China 1977). 1966) (from (counting a Korea 1885). (from years thirty-five Japan and 1839) from starting almost States United the took It 1780). from (starting income its fifty-e Kingdom United the took it Revolution, Industrial original the In 330): into the and spiral ofinto depreciation. hyperinflation mee to money printing started it If recession. the into country the capita the keep to rates interest raise to decided government faced Mexico Mexico, to currency hard in lend to willing was one curre the crisis. When government turned the into crisis currency the dollar, the sec short-term a “Tesebonos,” introduced and 1994 throughout rate exchange retai to tried government Mexican Because percent. 50 by devalued xeine hg got rts n rpd nutilzto. y 95 they 1995, By industrialization. rapid and rates growth high experienced we o itne urny rss tblzd fe te prom the after stabilized crisis currency intense of week A In the 1960s, Four Asian Tigers – Hong Kong, South Korea, Singapore and T and Singapore Korea, South Kong, Hong – Tigers Asian Four 1960s, the In t al.et 94. aia fe fo te onr. h ps aadnd h pg and peg the abandoned peso The country. the from flew Capital 1994).

79 Until the 1960s, it seemed that industrialization was industrialization that seemed it 1960s, the Until self-fulfilling expectations became decisive in gen in decisive became expectations self-fulfilling eading to it, see Eichengreen (1996, 186-191). 186-191). (1996, Eichengreen see it, to eading by Sachs et al. (1996), who argue that the Mexican the that argue who (1996), al. et Sachs by nd ran up short-term dollar debt. debt. short-term dollar up ran nd 129 78

h growth rates, which came to be be to came which rates, growth h l in the country, it would throw throw would it country, the in l pin f aa (rne 2000, (Frankel Japan of eption the Mexican Stabilization Act Stabilization Mexican the as long (forty-seven years, (forty-seven long as t its liabilities, it would fall would it liabilities, its t st resort. Further help came help Further resort. st n confidence in the stable stable the in confidence n s o itrainl help, international of ise nt capital inflows. Asian inflows. capital nt ccomplished the feat in in feat the ccomplished osbe eal. f the If default. possible uh h Treasury’s the ough ight years to double to years ight ee mn the among were urity indexed to to indexed urity ncy fell and no and fell ncy erating a panic panic a erating crisis had had crisis aiwan, aiwan,

CEU eTD Collection borrowed cheap in yen and dollars and invested in higher-yielding Asia higher-yielding in invested and Inve dollars and yen in 187). cheap borrowed 1996, (Eichengreen market stock soaring a by depressed been efrac pritd no h 19s Bten 92 n 19 Idnsa Malay Indonesia, 1995 and 1992 Between 1990s. the into persisted performance the capital inflows thus came from the United States and the capital Japan. from came thus inflows the United States U.S. on yields and Japan in conditions financial depressed of result economi differential and Japanese developing inter countries. between developed emerging the to attention their turned investors why factor which half went to Asia and one-third to Latin America. By 1993, tota 1993, By America. Latin to one-third and Asia to went half which economies transition and countries (developing markets emerging (Eichengreen 1996,187). exces in rates at grew all Thailand and Korea, South Singapore, accumulation (see Kim and Lay Young accumulation Krugman and Kim (see 1994; 1994,1995). 1994; rapi res additional of mobilization the on predominantly relied economies and productivity factor total in growth little was there w studies, the by challenged was view this However, 1993). Bank inequa World income (for environment low policy market-friendly a and relatively environment, macroeconomic up,” “catch technological investment, inflows strong rates, saving domestic high orientation, outward include in growth economic of rates highest the of some achieved and followed Mala and Thailand Indonesia, – countries Asian Southeast 1980s, the By 11). 1999, w of 10% than more accountedfor and exporters twentyleading world’s The growth of capital inflows was tremendous. In 1990, total capital capital total 1990, In tremendous. was inflows capital of growth The atr ta wr taiinly soitd ih h rpd g rapid the with associated traditionally were that Factors n h ery 90, h rpd rwh pre piae aia inflows capital private spurred growth rapid the 1990s, early the In 130

got o te at Asian East the of growth d ) were about $50 billion, of billion, $50 about were ) o 7 ecn pr annum per percent 7 of s ot o Ain countries Asian of rowth ources, especially capital capital especially ources, equity investment had had investment equity est rates were low as a ratesas a wereest low l capital flows rose to to rose flows capital l orld exports (Krueger exports orld n securities. Most of of Most securities. n s a itrs rate interest was es hich showed that that showed hich of foreign direct direct foreign of h wrd This world. the . An additional additional An . lity, a stable stable a lity, stors therefore therefore stors xml, see example, lw to flows ysia – – ysia sia, sia, CEU eTD Collection Latin to third 1999,112). America (Ito s and Asia to went percent 40 than less slightly which of billion, $160 significantlypercent 12).(ibid, about by 68 yea A market. stock c property the of the price share the 1997, July in in peg of abandonment reflected was situation The (ibid). 1988-96 22 from declined steadily loans manufacturing while percent, 24 about i loans property of share percentage the result, a As 9). 1998, (Miller 1990-1995 during annum per percent 33 lendi of growth lending total property with in invested was funds the of perc 41 share averaged sector significant property to A companies finance by lending 1994 (Itoincrease inflows bankbetweenand in credit 1999,117). 1993 res a As 1993. in Facility) Banking International (Bangkok facility international an opened Thailand banks, foreign from funds the of flow form the in mostly country the into came which inflows, capital were these but deficits account current experienced Thailand 1990s. export- Its 1980s. the in trade international to open to began Thailand pe 8 than more of rate growth average the in resulted strategy 1997. s which crisis financial the in element important an be to out bank of mix credibank of portion the increase Indonesia to started and investment a Malaysia credits, bank the on mostly relied Thailand received China Whereas differed. however, Asia, across inflows The investment. direct the of form the took Asia to flows capital p the of form the mostly took America Latin to flows capital The composition of the capital flows differed across the world re world the across differed flows capital the of composition The 131

rcent in the late 1980s and early and 1980s late the in rcent ortfolio investment, most of the of most investment, ortfolio atd n hiadi summer in Thailand in tarted ncreased from 15 percent to to percent 15 from ncreased of bank credit. To ease the the ease To credit. bank of and Korea FDI, the mostly composition of the capital capital the of composition ent per annum, compared annum, per ent ompanies in Thailand fell fell Thailand in ompanies ult, there was a threefold threefold a was there ult, t. The bank credit turned turned credit bank The t. aiy iacdb the by financed easily lightly more than one one than more lightly to 15 percent during during percent 15 to ng. The growth of of growth The ng. gions. Whereas the Whereas gions. credit and equity equity and credit offshore banking banking offshore led development led and Luangaram and bfr the before r CEU eTD Collection baht to increase its supply. When the direction of the capital the of direction the When supply. its increase to baht foreig the to come to had bank central Thai the dollar, to pegged at a pge a 2 t te .. olr Ta eprs ot price lost exports Thai dollar, U.S. the to 25 at pegged was baht Since 4). 1998, Luangaram and (Miller 1997 end to 1995 mid from percent 50 by order to decrease the pressures on its depreciation against t against depreciation its on pressures the decrease to order t this but again market exchange foreign the in intervene to had interes raise to be would strategies Alternative 80 apprec baht on pressures to led therefore and increased baht for forei the of sale a and baht of purchase a involved This banks. Thai int bank’s central the in reversal the to led problems These fo the inflows, capital the of period the During market. exchange accumulate. down, the the debt growthWhen started slowed to ab was Thailand growing Fast inflows. capital by financed was be deficit account current the exports, in fall the With 1999). (Ito becamerate growth export twelve-month The market.Japanese a appreciatedThedollar mid-1990s. the changein began to situation The where mismatch, maturity and currency the to led also It shocks. to relationship-bas the 1998 Zingales and (Rajan short-term claims their in kept investors investments their protect to order In 1998). P and McKinnon 1998, Zingales and Rajan (see credit to access gets who As the of causes of explanations of types several are not and connections There personal where capitalism,” “crony the on focuses LatinIndonesia,spread Malaysia, to quickly Korea, Ame Hong and Kong, Russia then float to currency the let bank central Thai 1997. summer in happened ex foreign its exhausted bank central the when point the to only worked would lead to the loss of business confidence and t and confidence business theofloss to lead would rates interest in rise The slowdown. a experienced

o an increase of the foreign-currency denominated d denominated foreign-currency theof anincrease o would throw the country into recession. Currency de Currency recession. into country the throw would rts r o e te urny o Hwvr te eco the However, go. currency the let to or rates t 132

he dollar.he flows reversed, the central bank bank central the reversed, flows ). This made the system prone prone system the made This ). zero by the beginning of 1997 1997 of beginning the by zero ime it had to purchase baht in in baht purchase to had it ime reign investors lent money to to money lent investors reign came a problem. Initially, it Initially, problem. a came e o rw u o te debt. the of out grow to le n exchange market and sell sell and market exchange n short-term liabilities were liabilities short-term iation. Because baht was was baht Because iation. gn currency. The demand demand The currency. gn 80 ervention in the foreign foreign the in ervention ian crisis. The first one one first The crisis. ian However, this strategy this However, opttvns i the in competitiveness the market determine determine market the change reserves. This This reserves. change on 2 July. The crisis The July. 2 on ed system, Western Western system, ed ill 1998, Krugman 1998, ill gainst the yenthe gainst ebt. ebt. the Thai the valuation valuation rica. rica. nomy CEU eTD Collection panic led to a vicious downward spiral that brought the region to its knees. the region its to that brought panic a led to downward spiral vicious The explanation is that the crisis was caused by the financia the by caused was crisis the that is explanation The the Although rever countries. huge a such was there other why clear not is it imbalances, to fast so spread it why and time that Radelet nrae n h iwr drc ivsmn (e ln 5. rga ( Krugman 5). line (see investment direct inward the in increase holding equity foreign of sell-offs large and capital short-term ma a was there although However, 8). (line 1997 in USD billion -21.3 to 1996 fell which lending, bank the in was outflow largest The 4.1). Table (se 1997 in billion 12 of outflow an to 1996 in USD billion 93 of inflow an from ar allocati and resources and prices asset in explanations problems macroeconomic two the connect (1998) Luangaram and Miller region. th withdrew and countries the between differentiate not did investors the by hit was country one when Thus, 35). 1998, (Hu countries individual for funds “Asia-Pac through region Asian East the into channeled was which nat the is this explain may that factors the of One markets. curre the in contagion cross-border of evidence provide and – Philippines Malaysia, Thailand, – countries affected most five the examine Ba 2000). Sachs and Radelet (see market exchange foreign the through b a essentially was and prophecy self-fulfilling of element Luangaram Krugman andMiller 1998). 1998, bu asset included factors domestic The 1998). Velasco and Chang (see denomina were assets long-term and currency foreign in denominated The crisis was followed by a reversal in private capital f capital private in reversal a by followed was crisis The However, the type of capitalism in the country fails to explain why the country in explain fails to However, the capitalism cri the type of et al.et 1998; Radelet and Sachs 2000; and Taylor 1998). The crisis thus involved a involved thus crisis The 1998). Taylor and 2000; Sachs and Radelet 1998; 133

sal of fortune in the entire region. entire the in fortune of sal l panic (see Furman (see panic l r o teprflo investment, portfolio the of ure s, at the same time there was an was there time same the at s, ank run that manifested itself itself manifested that run ank on combined with the creditor the with combined on lows. Net private flows turned turned flows private Net lows. noei, oe ad the and Korea Indonesia, 1998b) suggests that this this that suggests 1998b) from 55.5 billion USD in USD billion 55.5 from e funds from the entire the from funds e ific” funds rather than than rather funds ific” ig and Goldfajn (1999) (1999) Goldfajn and ig ted in local currency currency local in ted bbles (Quigley 2001; 2001; (Quigley bbles e ee economic were re ncy and equity equity and ncy ssive flight of of flight ssive sis erupted at eruptedsis at u ta the that gue et al.et e line 3 of 3 line e crisis, 1998; 1998; n CEU eTD Collection Notes: Notes: Source: Miller and Luangaram (1998, 7) (1998, Luangaram and Miller Source: gold, monetary netlending, -resident Including 2 and Thailand, Malaysia, Indonesia, Korea, - South 1 FiveTable in Net Flows 4.1: Asian Capital Economies assets at fire-sale prices. they that firms manymultinational of perception the reflected t at and ownership; foreign to unfavorable policies old dropped had IMF, und government, Asian as changes, policy reflected investment inward e rvt lw 4. 7. 9 -21 -9.4 -12.1 93 77.4 40.5 Net private flows iaea rdtr 74 . 07 . 6.1 4.3 0.7 -27.1 24.6 22.7 4.2 27.2 -18.3 -13.7 -0.2 7.4 -5.4 3.6 18.5 =increase) Reserves (- exl.gold 7 23 -14.1 -17.3 -3.2 lending/other, Resident net -21.3 -1 -7.6 55.5 13.7 9.8 -0.6 74 Bilateral creditors 49.5 18.4 1.9 7.2 -0.4 12.4 61.8 -11.6 24 International institutions financial 12.1 28.2 7 4.2 10.6 Net official flows 4.9 7.6 7.9 4.7 -4.5 Non-bank creditors private 19.1 15.5 Commercial banks 12.2 15.2 Private creditors 15.2 92.8 equity Portfolio 17.6 80.9 47.4 -26 Direct equity -54.9 -41.3 Equity investment -24.6 financing,External net Current balance account 94 95 96 97 1998 1997 1996 1995 1994 2

1. -59 1. -19 -5.7 -11.9 -19.6 -25.9 -17.5 and errors and omissions. omissions. and errors and the Philippines thePhilippines 134

1 , billions of USD could buy Asian companies and and companies Asian buycould er pressure from the the from pressure er e ae ie it time same he CEU eTD Collection banks whose nationalities were not American, Japanese, or Europe or Japanese, American, not were nationalities whose banks hal Almost Europe. in banks to capital the channeled which banks,

on neoliberal economic principles. on neoliberal principles. economic ad structural upon conditioned were packages The countries. affected final destination. They found out that the majority of the outflows went went outflows the of majority the that out found They destination. final 4.4 Global ImbalancesGlobal 4.4 from Japan. from outflows the of most for destinations final the were Europe and exchange for exports. their oil to started quickly countries these oil, of price the in increase else lied countries oil-exporting the of surpluses account current account current enormous exchangeregime fixed the and growth export-led the of combination Its crisis. the by unaffected was China cris potential future the of impacts the buffer to meant were experience traumatizing the by motivated were surpluses account InE 39). 2009, (Wolf deficits account current running stopped whole a as 4.1) Figure (see flows capital the of pattern the in development n epne o h cii, h IF rae a eis f rescue of series a created IMF the crisis, the to response In Wincoop and Yi (2000) tried to follow the trail of money out of Asia of out money of trail the follow to tried (2000) Yi and Wincoop h frt eae f h tet-is mlenu ws akd b marked was millennium twenty-first the of decade first The

135

es. Compared to South East Asia, East South to Compared es. . In 1999 the developing world world developing the 1999 In . of the East Asian crisis and crisis Asian East the of accumulate petrodollars in in petrodollars accumulate where. Following the high high the Following where. an. Yet, the United States States United the Yet, an. f of the outflows went to to went outflows the of f . The source of the recent the ofsource The . justment packages based based packages justment the crisis countries and countries crisis the akgs o te most the for packages te ot puzzling most the y ast Asia, the current the Asia, ast a a eut f a of result a was o fsoe center offshore to to ascertain its ascertain to CEU eTD Collection oe Eegn Ai: noei, aasa Philippin Malaysia, Indonesia, Asia: Emerging Note: countries selected in accounts Current 4.1: Figure ieenh etr o te ntd tts fe te ol Wr I War World the after States United the or century nineteenth was as world, the of rest the credit to tended economieslargest wh historical pattern, from the major deviation has a been trend 2006.This USD in 6% of low the reached account current U.S. The 2). 2005a, Setser and wo the of rest the that savings the of 80% least at absorbed world’s the time same the at and power military major the and Nig Libya, Kuwait, Kazakhstan, Iran, Gabon, Guinea, An Algeria, are countries exporting Oil/gas Taiwan. Guinea,Q Equatorial Algeria, for 2009 Database WEO Ban Central ROM). (CD IFS from Data author. Source: and Venezuela, Emirates, Arab United Turkmenistan, -1000 -800 -600 -400 -200 200 400 600 On the other side of the specter was the United States, the wor the States, United the was specter the of side other the On 0 2000 Euro Area EmergingAsia CHINA 2001 2002 2003 United States United Exporters Oil JAPAN Yemen. Yemen. 136 eria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sy Arabia, Saudi Russia, Qatar, Oman, Norway, eria, atar, Turkmenistan and United Arab Emirates. Emirates. Arab United and Turkmenistan atar, s Taln, ot Kra Snaoe Hn Kn and Kong Hong Singapore, Korea, South Thailand, es, oa Aebia, ari, og, cao, Equatori Ecuador, Congo, Bahrain, Azerbaijan, gola, 2004 k of the Republic of China (Taiwan) for Taiwan, IMF Taiwan, for (Taiwan) China of Republic the of k

and regions, 2000-2008, billion USD. USD. billion 2000-2008, regions, and 2005 rld did not invest at home (Roubini home at invest not did rld the case of Great Britain in the in Britain Great of case the 2006 I. The only region, which which region, only The I. largest debtor. In 2005 it it 2005 In debtor. largest GDP or 803.5 billion 803.5 or GDP ld’s largest economy largest ld’s 2007 2008 ere world’s ere world’s ria, ria, al

CEU eTD Collection od. h acmltd oeg ecag rsre wr te – most – then were reserves exchange foreign accumulated The bonds. by the oil price increases and the financial crisis, which began in 2007. which beganandby crisis, 2007. the increases financial in price the oil ewe te .. n Ciee aig rt jme t mr ta 3 per 33 than more to jumped rate savings Chinese and U.S. the between Niall Ferguson and Moritz Schularick labeled Schularick Moritz and Ferguson Niall emni prcain Ised i mpe u te xes liquidity excess the up mopped it Instead, appreciation. renminbi pressur inflationary to lead would it because circulation the into not could – investment alternative of lack to due savings company soa was system banking whose – China exports. the for payment in U of inflow to led States United the with surplus trade China’s othe the On decade. last the throughout deficits account current the as current running sust to States United countries the enabled States United the the to surpluses from capital of inflow continuing the hand, one wi these were However, and 2006. surpluses between 2002 current account ran modest the and experience historical the with line in behave to seemed currentaccount surpluses. 23% approximately to GDP of 30% roughly from fell levels investment the following However, level. GDP of 30% approximately at remained Emerging in Asia average. savings rates The 38% to 2005-2008 average from 22% 1995-1999 by oil-exporte can also observed the rates increase be the savings in diff the 2008, and 2005 Between (WEO). period same the over 52% almost to 40% f rose rate savings Chinese the 2008, in 13% barely to 1998 in 19% almost saving national U.S. the Whereas 4.2). Table (see ratios savings and The large current account imbalances reflected the imbalanc the reflected imbalances account current large The h itreedny eainhp ht mre bten hn ad A and China between emerged that relationship interdependency The 137 Chimerica

, captured the most attraction. On the On attraction. most the captured , .S. dollars to Chinese economy economy Chinese to dollars .S. ain the high spending as well well as spending high the ain ory, was the Euroarea, which which Euroarea, the was ory, rs, whose savings rate rose rose savings rate rs, whose es in the world investment investment world the in es ked with high private and private high with ked es and the pressures for for pressures the and es allow the money to flow flow to money the allow y eln sterilization selling by s rate kept falling from from falling kept rate s y ivse it the into invested – ly 1997 Asian crisis, the the crisis, Asian 1997 sd o te planet, the of side r , this way widening widening way this , rom approximately rom et A significant A cent. merica, which which merica, account account ped out out ped erence CEU eTD Collection oe Eegn Ai: noei, aasa Philippin Malaysia, Indonesia, Asia: Emerging Note: States. States. South-East from flows capital the of effects the to paid is countr oil-exporting and Asia emerging of surpluses account current ne The deficit. current U.S. the finance to motivation its and savings economic an to China of rise the discuss I First, deficit. financ account to regions various of dimension) (political willingness the and percenta a as Balances Saving/Investment 4.2: Table assets China. financial to exported States a States United the to products exported China Thus, Treasuries. U.S. 1995, Libya 2006-2008, Oman 2008, Qatar 2008, Turk Qatar 2008, Oman 2008, Libya 2006-2008, 1995, Nig Libya, Kuwait, Kazakhstan, Iran, Gabon, Guinea, An Algeria, are countries exporting Oil/gas Taiwan.

ore Itrainl iaca Saitc, ol E World Statistics, Financial International Source: and Venezuela, Emirates, Arab United Turkmenistan, mrigAi 3.0 97 3.7 95 2.1 33 2 23.35 23.71 29.53 30.97 29.74 32.10 Asia Emerging In the following section, I discuss the reasons behind the ability the behind reasons the discuss I section, following the In i xotr 2.9 00 3.9 60 2.3 35 - 23.56 22.73 26.03 37.89 30.02 21.99 Exporters Oil ntdSae 1.9 47 1.1 89 1.6 94 - 19.41 19.26 18.99 13.91 14.79 16.89 States United uora 14 2.7 09 2.6 05 2.9 .8 0 0.78 20.99 20.54 20.66 20.94 20.97 21.43 Euroarea Region Region hn 4.2 11 5.4 88 3.4 35 20 2.36 2.00 43.55 38.74 38.83 52.94 41.11 40.82 China aa 2.7 67 2.9 73 2.3 34 23 2.91 2.30 23.40 23.83 27.36 27.29 26.74 29.67 Japan Savings Investment Current Account Account Current Investment Savings 1995- 1999 1999 2000- 2004 2004 2005- 2008 2008 ge of GDPgeof ooi Otok ntoa dt. aa isn fr An for missing Data data. national Outlook, conomic Yemen. Yemen. 138 eria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sy Arabia, Saudi Russia, Qatar, Oman, Norway, eria, s Taln, ot Kra Snaoe Hn Kn and Kong Hong Singapore, Korea, South Thailand, es, oa Aebia, ari, og, cao, Equatori Ecuador, Congo, Bahrain, Azerbaijan, gola, menistan 1995 and United Arab Emirates 2008. 2008. Emirates Arab United and menistan1995 1995- 1999 1999

2000- 2004 2004 Asia and oil-exporters to the United the to oil-exporters and Asia 2005- 2008 2008 oe, h sucs f its of sources the power, ies. Finally, the attention attention the Finally, ies. 1995- xt section discusses the the discusses section xt 1999 1999 4.04 7.29 14.33 14.33 7.29 4.04 -5.49 -4.48 2.10 (economic dimension) (economic .57 6.03 7.62 7.62 6.03 .57 nd in turn, the United the turn, in nd te .. current U.S. the e 2000- 2004 2004 .43 -0.05 -0.05 .43 3.88 3.88 9.39 9.39 2005- 2008 2008

gola gola ria, ria, al

CEU eTD Collection uzig Te hns eooy i nt xas is rwh oeta under potential growth its exhaust not did economy Chinese The puzzling. Naughton 1995, 62). Naughton (1995) argues that as neither economic, nor poli nor economic, neither as that argues (1995) Naughton 62). 1995, Naughton 4.4.1 China n u t 17, e upre rpd ev idsra dvlpet (Bachm development industrial heavy rapid supported he 1978, to up and prop a always not was Xiaoping Deng However, Party. Communist conservati the over supremacy gained who Xiaoping, Deng by led a by engineering political of result the were reforms the Harding 1976. in death Zedong’s Mao after China in state economic the of a viewed be cannot reform economic the Thus, development. of system ec the of launch The growth. economic the of path the on country the set centrally the into elements market introduced which reform, economic as productive all of control state of years after 1978, a In was country. China ago, years Thirty miracle. economic an of short nothing h epr sco ee bfr te einn o te eom era reform the of beginning the before even sector export the l This capacity. earning foreign-exchange increase and technology l Chinese factors. international by also eased was reform desire The They economies. Asian other and Japan of development economic reforms. dr the for space the opening way this 1978, of Year end the Ten at collapsed infeasible the of policies the result, a As growth. economic command the of rehabilitation of impulses twin were there a 1976 in death Mao’s Between program. recovery the of planners the result the was reform the that claims He explanation. the for reform, economic the of launch the explain satisfactorily can Similar to the postwar Japan, the rise of China to an economic an to China of rise the Japan, postwar the to Similar 139

coalition of reform-minded leaders leaders reform-minded of coalition of the economic crisis created by by created crisis economic the of it is necessary to look elsewhere elsewhere look to necessary is it ln dpe drn 1978 during adopted Plan (Naughton 1995, 63). The The 63). 1995, (Naughton ed to an attempt to reform to attempt an to ed onent of economic reform economic of onent ve faction in the Chinese the in faction ve es Cia anhd an launched China sets, eaders witnessed the fast the witnessed eaders system and accelerated accelerated and system mtc e o economic of set amatic planned economy and economy planned s a direct consequence consequence direct a s power seemed to be to seemed power d h ed f 1978, of end the nd d to import Western import to d poor and isolated isolated and poor (1987) argues that that argues (1987) onomic reform is reform onomic h Soviet-type the an 1985, 60; 60; 1985, an tical factors tical CEU eTD Collection rdcs sc a txiepout. h sces f h Ciee text Chinese the of success The products. textile as such products, cont year, per percent 6.6 of rate a at advanced China in productivity Xiaop Deng that asserts jokingly (2009) Ferguson 81 the United States. visit was to the first Chinese leader Janua In States. United the with rapprochement pragmatic a sought confr To States. United the than China to threat greater a it made geographic the that belief Mao’s in resulted split Sino-Soviet politic the once enabled was West the with cooperation economic sc of economies the exploiting way this locality, a in product one on economies” “lump so-called form to ability the by given extent labor period 1978-2001 the Over 1997). Khan and Hu 2009, Wang 2003, (CSLS growth fu was growth economic strong This (ibid). GDP nominal Japanese GDP nominal U.S. the of 35% approximately represents This (WEO). int 4833 of GDP nominal a developed with Japan and States United the It after economy downs. and ups im an few at growing with been has year China reforms, a of percent introduction the 9 Since than more United States and seeing for himself what the free free whatthe himself for seeing and States United after Germany (China Daily, 28 Oct 2008). Initially, China expor China Initially, 2008). Oct 28 Daily, (China Germany after sec world’s the it making 8.8%, reached exports world’s in share China 2007, and 1992 between Just exports. boosted Freund growth and economic(Amiti percent strong 500 The than more by increased exports real enterprises.town manufac innovative and agriculture from force labor underemployed rates domestic high by fueledwas growth productivityThe (ibid). the and sector agricultural the in lowest the was It sectors. uni not was growth productivity the However, 7). 2003, (CSLS growth output

market can achieve. achieve. marketcan 140 ing set China on a new economic course by visiting by course economic new a on China set ing

81

highest in the industrial sector sector industrial the in highest al proximity of Soviet Union Union Soviet of proximity al or industrial clusters focused focused clusters industrial or ont the Soviet Union, China China Union, Soviet the ont of investments, inclusion of inclusion investments, of al relations improved. The improved. relations al ted mostly labor-intensive labor-intensive mostly ted ond largest exporter, only only exporter, largest ond eled by rapid productivity productivity rapid by eled ile industry is to a large large a to is industry ile ry 1979, Deng Xiaoping Deng 1979, ry 2008). In 2007, China’s 2007, In 2008). and almost 97% of the of 97% almost and ale to a maximum (see maximum a to ale ributing 70 percent of percent 70 ributing turing forms, such as as such forms, turing billion USD in 2009 in USD billion o the third largest largest third the o pressive pace of of pace pressive om across form the the ’s

CEU eTD Collection been open to Chinese imports, tops the list. Already in 2000, China China 2000, in Already list. the tops imports, Chinese to open been The regions. world various with surplus trade large a in resulted 2008) Freund and (Amiti computers and appliances electronics, consumer manuf hard of share increasing an saw exports its 2007, and 1992 Between superp socks the from evolved it time of period short relatively of composition the diversify to able was China astonishing, more even (Ba output world’s the of third a over and planet the on person every m – year each socks of pairs billion nine produced Datang 2004, In socks. peop 1000 with village farming rice a was Datang 1970s, late the worl the Datang, is example famous A 2007). Wang or 2004 al. et Zhang meant for one million residents, were still empty. Patrick Chova Patrick empty. werestill residents, million one for meant ne the of buildings modern new and streets the 2009, of end the At Ordos. old km 30 somecity newa Ordos,a built government the 2009, and 2004 Between the to thanks Texas, China’s as described is place The Mongolia. illu An activity. economic of areas some in observed be still allocation China’s resourceby the (ibid). However, of output thirds industrial a million 200 over employed businesses whose entrepreneurs, million 40 illegal was entrepreneurship private 1978, In (ibid). half than more s sector’s nonstate pr truly by produced share the the with GDP, of two-thirds 2002, exceeded By 2009-2010). Zhou and (Gregory percent 20 other out grew economy The success. a obviously, were, reforms The t while GDP, China’s of percent 80 generated enterprises state 5).figure (Ito ($83 2009, billion) total), of (32% billion $256 was China with deficit trade U.S. the 2007, le long-time the replacing deficit, trade U.S. the to contributor 141

stration is Ordos, a city in Inner in city a Ordos, is stration he rural commune produced the producedthe commune rural he nec from Tsinghua University University Tsinghua from nec ower to a complex exporter. complex a to ower le who gathered and stitched stitched and gathered who le dn cnrbtr Jpn In Japan. contributor, ading ivate companies comprising companies ivate . In 2009, there were over over were there 2009, In . ntd tts wih has which States, United massive coal deposits. deposits. coal massive had become the largest largest the become had rboza 2004). What is What 2004). rboza of the plan. In 1978, In plan. the of . The rise in exports exports in rise The . d’s socks capital. In capital. socks d’s about triple Japan’s triple about ore than one set for for set one than ore nd generated two- generated nd t eprs I a In exports. its visible hand can can hand visible actures, such as such actures, w Ordos, a city city a Ordos, w awaythe from hare CEU eTD Collection place where they can put their cash. The lack of domestic inves domestic of lack The cash. their put can they where place parallel exchange markets unified. Between 1997 and 2005, the currency was pegge was currency and 2005,the Between unified. 1997 exchangeparallel markets revalution, refer to Hufbauer and Brunel (2008) and (2008) Brunel and Hufbauer to refer revalution, relati trade Sino-American the of review the For 82 Trilemma to Solution 4.4.1.1 real view not do people that argues Chovanec estate. real the Nov the is dissertation 9 this of topic the to regard in interesting (AlJazeeraEnglish, build you then growth, that achieve to way b to are system the in incentives the so forwards come to wants gr GDP % 8 get didn’t he that reports who man a be to wants “Who repo to desire the by motivated was project the that suggests an rolebelow. important the told story in S Between exports. its of competitiveness price the maintain II” dubbed Woods assystem “Bretton therefore and someby Dooley (see was the resembles trilemma the to solution a Such sacrificed. was inde The peg. the undermining from flows capital prevent to controls e fixed the of stability the for opted China model. development trilemma the to solution the and growth export-led the to commitment 1.50 renminbi per dollar in 1980 to 8.62 renminbi per USD in 1994, when the when 1994, in USD per renminbi 8.62 to 1980 in dollar per renminbi 1.50 poiin ae rm Congress. from trade came Japanese-American opposition the to Similar States. United the in pe Chinese the of valueThe dollar. per renminbi 8.27 ofrate the at h wliges f hn t fnne h US cret con defic account current U.S. the finance to China of willingness The Since the beginning of the reforms, renminbi was devalued several devalued was renminbi reforms, the of beginning the Since

82 hn ws cue o mnpltn is urny to currency its manipulating of accused was China Hufbauer Hufbauer 142 n ad h Cnrsinl il amd t h renmin the at aimed bills Congressional the and ons

et al. et (2006). (2006). motivation behind the investment to investment the behind motivation eptember 2003 and 2008, some 2008, and 2003 eptember estate as a place to live but as a a as but live to place a as estate post-World War II monetary monetary II War post-World t h tree GP growth: GDP targeted the rt tment opportunities will play will opportunities tment uild and if that’s the easiest easiest the that’s if and uild g caused much political stir political much gcaused debate, the protectionist protectionist the debate, xchange rates and capital capital and rates xchange pendent monetary policy policy monetary pendent owth this year? Nobody year? this owth subordinated to this this to subordinated times from about from times it stems from its its from stems it 2009).” What is is What 2009).” et al. official and and official 2003). 2003). d to dollar dollar d to bi CEU eTD Collection point out to the problems of the U.S. economy – low savings rate, and s and rate, savings low economy– U.S. the problemsof the to out point period, the U.S. dollar depreciated by 15% on a real trade-weighte real a on 15% by depreciated dollar U.S. the period, by 17% by July 2008, but on a real trade-weighted basis, the degree the basis, trade-weighted real a on but 2008, July by 17% by atal aotdb te ht Hue Tesr Secretaries Treasury House. White the by adopted partially consumer and government spending. consumergovernment and globa the resolve would renminbi of appreciation an that idea the unfai an China given has policy exchange-rate Chinese that accusation reserves holdings in the last few years fewreserves holdings (see below). the last in rise rapid the by evidenced be can This (ibid). system rate essenti China that and best at minimal is appreciation yuan’s limit were revaluation the of effect the However, 6). 2009, (Ito 8% renminbi the revaluation, 2007 the Following 2007. May in 0.5% to widened was dai trading permitted day. The the central parity per 0.3%narrow around of band allowed and currencies foreign of basket a to pegged been has rate doll U.S. per renminbi 8.11 to 8.28 from 2.1%, by revalued was renminbi long-ter own China’s in was it so volatile, too become had dollar shift the that said China, of Bank People’s the of head Xiaochuan, interest of the globalUnited interest States. and of the the economy is flexibility rate exchange that China persuade to tried whether on debate “[t]he that sums 6) (2009, Ito 83 simi A 2008). Brunel and (Hufbauer value currency the on since increasingly introduced bills and practices, commercial unfair Chinese floa were sponsors various with bills congressional new dozen three settled. Dunaway, Dunaway, settled.

eetees Ciee uhrte itoue a osrie fot n July on float constrained a introduced authorities Chinese Nevertheless, However, Chinese authorities have had a different stance on the is the on stance different a had have authorities Chinese However, et al. et (2006) estimate the degree of undervaluation rangi undervaluation of degree the estimate (2006)

143 n hw uh h rnib i udraud s a fr far is undervalued is renminbi the much how and

83

in its own interest, as well as in the the in as well as interest, own its in John Snow and Henry Paulson Paulson Henry and Snow John ally maintains a fixed exchange fixed a maintains ally in the country’s international international country’s the in ng from zero to 50%. Cheung et al. al. et Cheung 50%. to zero from ng l imbalances. Instead, they they Instead, imbalances. l ed as during the same time time same the during as ed d basis, indicating that the that indicating basis, d m interest to change. The The change. to interest m of appreciation is merely is appreciation of January 2005 focused focused 2005 January ted to challenge alleged alleged challenge to ted was made because the the because made was r advantage, as well as as well as advantage, r uggest cuts in both the both in cuts uggest o lcut wti a within fluctuate to sue. They reject the the reject They sue. ar. The exchange exchange The ar. lar rhetoric was was rhetoric lar ly fluctuation ly 2005. Zhou 2005. appreciated om om CEU eTD Collection Nevertheless, China’s capital controls still remain substanti remain still controls capital China’s Nevertheless, but also on the capital account. China’s gross capital account flows account capital gross China’s account. capital the on also but direct overseas investment (Glick and Hutchinson 2008,7). (Glick direct and Hutchinson overseas investment mar local in bonds denominated a foreign-exchange issue to firms flexibility relaxed, were residents domestic by The conversion outflows. currency encourage to started China mount, to began renminbi the the When slow. been has flows capital non-FDI of Liberalization rates and persistent dollar/renminbi interest rate different rate interest dollar/renminbi persistent and rates of and onshore between gaps significant and sustained by especially hn’ ttl rs cosbre fos n 05 cmae wt 1% n 1982 in 13% with compared 2005, in flows cross-border gross total China’s c the on only not visible was increase The 2). 2007, McCauley and (Ma 1982 from 2005 in 120% above to quintupled than more flows cross-border gross pe a As accounts. capital and current the both on flows external of relaxation, recent their before even time over effective less

RM the that evidence statistical little find (2007) compare studies on the degree of renminbi’s underva renminbi’s of degree the on studies compare heavily controlled.heavily capital and inflows portfolio while encouraged, been have inflows t on policies, Door Open controls of start the impose Since pressures. appreciation to and pressures depreciation resist to to i.e. outflows wind,” the against “lean to tend makers policy The controls. Bank’s price surveys, Cheung Cheung surveys, price Bank’s h cptl otos n hn, e Gik n Hutchi 1980 the period and over controls capital of chronology Glick see China, in controls capital the t account current for exchange free allows China 84 2006.” ept te diitains fot te aia cnrl were controls capital the effort, administration’s the Despite In order to protect the peg from the disruptive capital flows capital disruptive the from peg the protect to order In 84 However, controls for more volatile cross-border flows remained t remained flows cross-border volatile more for controls However, et al. et (2009) estimate the extent of RMB undervaluation t undervaluation RMB of extent the estimate (2009) i udraud Cie n Wlimo (08 surve (2008) Williamson and Cline undervalued. is B – January 2005. 2005. January – ransactions since December 1996. For a brief overvi brief a For 1996. December since ransactions o (08. rsd n Wi 20) rvd a extens an provide (2005) Wei and Prasad (2008). son 144 luation. In a more recent paper, by using updated W updated using by paper, recent more a In luation.

ials during the period of a of period the during ials as can be documented by the size size the by documented be can as ally binding. This is documented is This binding. ally he foreign direct investment investment direct foreign he , China relies on the capital capital the on relies China , rcentage of GDP, China’s GDP, of rcentage appreciation pressures on pressures appreciation represented one third of third one represented leaky and tended to be be to tended and leaky fshore renminbi interest renminbi fshore outflows were initially initially were outflows d ak wr given were banks nd kets and to raise their their raise to and kets moe otos on controls impose o be at most 10% as of of as 10% most at be o nlw t resist to inflows less than 20% in in 20% than less etitos on restrictions urrent account account urrent de factode (ibid). y and and y ew of ew ight. orld ive ive

CEU eTD Collection bought primarily by commercial banks. This effectively decrea effectively This banks. commercial by primarily bought $2000 billion for (Bloomberg, the first time $2000 billion 15 2009). 15July the reserves, exchange foreign China’s 2009, July of As reserves. the of holder largest world’s the as Japan replaced China 2007, In 2000s. h rnib mntr bs expands. base monetary renminbi the substantial fromthe comes liquidity Additional 85 considerations Macroeconomic 4.4.1.2 Cheung (see peg dollar and Hutchison 2008). and Hutchison 2008). (ibid). re for currencies foreign other and dollars these of share lion’s m they Instead, 2008). Shenk (Humpageand limited is country the of trade outside through acquire they that dollars the reinvest to residents t However, assets. renminbi-denominated of purchases foreign from aiiis I Arl 03 te eta bn itoue te “sterili the introduced bank central the 2003, April In facilities. and rediscounting the on rates interest higher or sectors, certain curb to banks to guidance window requirements, reserve raised as such several uses quantitat and China administrative include tools of standard The Banksterilization. People’s The inflation. and economy the of would supply money the in increase uncontrolled sterilized, routinely When the central bank buys U.S. dollars from and sells renminbi sells and from dollars U.S. buys bank central the When The peg has been undermined by the capital inflows resulting from resulting inflows capital the by undermined been has peg The

As a result of this policy, the foreign exchange reserves have have reserves exchange foreign the policy, this of result a As et al. et 2006; Ma and McCauley 2007; Liu and Otani 2005; and Glick and 2005; Otani and Liu 2007; McCauley and Ma 2006;

85 f olr ucae b te eta bn wr not were bank central the by purchases dollar If private savings, see below. below. see savings, private 145

nminbi with the People’s Bank People’s the with nminbi ses the amount of their capital their of amount the ses zation bonds”. These are are These bonds”. zation he ability of the Chinese the of ability he n iwr investments inward and ive controls on lending, lending, on controls ive world’s biggest, topped topped biggest, world’s noltrlzd lending uncollaterilized skyrocketed during the during skyrocketed lead to an overheating an to lead excessive lending to to lending excessive to Chinese residents, Chinese to foreign exchange exchange foreign trade surplus or or surplus trade ust exchange the exchange ust ol o the of tools CEU eTD Collection past few years, these profits may have disappeared since t since disappeared have may profits these years, few past for a yuan of foreign-exchange reserve that flowsi that reserve foreign-exchange yuanof a for For debated. is sterilization the of success The 86 and Setser (Roubini 2005b,3). 1108RMB to billion from 303RMB billion pap sterilization of stock the 2004, in Solely credit. for available home-loan market in the United States (New York Times, 21 July 2008). 21July Times, home-loan the United (New in States 2008). market York for account which companies, mortgage-finance two the Fanni Mac, Freddie troubled the by issued securities in billion $376 held China 2007, June 15 July 15 (Bloomberg, a debt other in also invested been Treasuries has reserves of portion a However, of billion $763.5 held China 2009, July In i going share highest the with bonds, denominated dollar U.S. the into other to the exchange relative Chinese currencies. foreign reserves shrinks Once dollars. more printing by simply awaydebt its inflate i States United the that means This dollars. U.S. the in denominated Fi bonds. sterilization the holding system i banking to cost there opportunity Thus, 2006). (Bernanke markets financial private of development interfe potentially investors, private and banks by held be might for substitute could bonds sterilization Second, 2008). Shenk and Tr (Humpage U.S. on yields pushed has markets financial in turmoil and up short Bank’s the on rates pushed has China in inflation as 2007, summer in short-t on rate interest the exceeded has securities Treasury Alt Treasuries. U.S. low-yielding buys and bonds sterilization costly. is sterilization the First, problems. several with On the other hand, the Chinese central bank invests its largefore its invests bank central Chinese the hand, other the On h srtg o slig trlzto bns n byn US Tr U.S. buying and bonds sterilization selling of strategy The

example, Wu (2009) suggests that only 35 cents are cents 35 only that suggests (2009) Wu example, nto China. China. nto 146

The central bank sells high-yielding high-yielding sells bank central The he beginning of the financial crisis financial the of beginning he the dollar depreciates, the value of of value the depreciates, dollar the r Ciee euiis vr the over securities Chinese erm er increased by 300%, rising rising 300%, by increased er hough the yield on U.S. U.S. on yield the hough ig ih h got and growth the with ring ssets. For example, as of as example, For ssets. easury securities lower lower securities easury nto the U.S. Treasuries. U.S. the nto nally, the U.S. debt is debt U.S. the nally, s theoretically able to to able theoretically s ign exchange reserves reserves exchange ign auis s associated is easuries almost half of the the of half almost 86 -term instruments instruments -term

other assets that that assets other a significant a s e Mae and and Mae e sterilized sterilized 2009). 2009). CEU eTD Collection backed also by Brazil, India and Russia, countries, who are also conce also are who countries, Russia, and India Brazil, by also backed SD the of introduction the on based problems imbalances payments

unemployed or underemployed workers (Berryunemployed underemployed workers 2005). or ne of millions of tens the provide will that growth economic continued politic the that believes Council State the and issues, financial political p focusedprimarilyon Council State ofthe hands the in is decision is dollar U.S. the against revaluation renminbi of solution associated with further appreciation in the renminbi. associated further the appreciation renminbi. with in a bank central the makes assets currency-denominated foreign unlikely. The development of SDR money markets that are liquid enou liquid are that markets money SDR of development The unlikely. forei the as dollar U.S. dollar-to-SDR the of role traditional the in shift sudden a Second, of losses rate exchange bear would who clear problem several are There reserves.exchange foreigndollar solution the and Woods Bretton original the during dilemma Triffin’s i argument This Rights. Drawing Special the currency, reserve replace to proposed he Therefore, have. would otherwise than longer b housing and credit country’s causing cheaply, borrow America let dollar’s the that said He 2009). July 11 Economist, (The imbalances would currency national a on based system financial international a China, of Bank People’s the of governor the Xiaochuan, Zhou 2009, March In persuadetothe attempts it strategies. First, two adopted h Ciee uhrte ae el wr o tee rbes How problems. these of aware well are authorities Chinese The Furthermore, the currency mismatch between renminbi-denominated renminbi-denominated between mismatch currency the Furthermore, In order to diversify out of dollars without triggering a fall of the of fall a triggering without dollars of out diversify to order In 147

world to adopt a new global currency. anewadoptcurrency. global to world s with this proposal. First, it is not not is it First, proposal. this with s al stability is dependent on the on dependent is stability al s strongly reminiscent of the of reminiscent strongly s subject to the financial loss loss financial the to subject olitical stability rather than stabilityrather olitical tend to exacerbate global global exacerbate to tend main reserve currency is is currency reserve main Rs. Zhou’s proposal was was proposal Zhou’s Rs. the dollar with a global a with dollar the reserve-currency status status reserve-currency gh for the SDR to be a be to SDR the for gh rned about their large large their about rned y o fail. This feasible. not ly n xhne (ibid). exchanges gn bls o ess for persist to ubbles U.S. dollar, China China dollar, U.S. ever, the apparent apparent the ever, w jobs needed by by needed jobs w o h balance-of- the to iblte and liabilities rgued that the that rgued CEU eTD Collection pressures on the renminbi. pressuresrenminbi. onthe the peg because it would lead to depreciation pressures on the the on pressures depreciation to lead would it because peg the central the to counterproductive be would dollars of sale The market. dolla of sale require would that because assets dollar-denominated aw diversify to China for problematic it makes surplus trade dollars U.S. of inflow continued the foremost, and First horizon. short-term m forward for invoicing China’sbe trading reluctant will (i use to renminbi partners real a and convertibility renminbi full without However, Indonesia,Mal Kong, Hong Belarus, Argentina, with agreements swap of Bank People’s The (ibid). China and Brazil between discussed bilater in currencies their of use the expand to agreed China financ and trade international in renminbi the of use international C see theories, discussion the of detailed a For 87 only won a major after the war. United States doll U.S. the Furthermore, (ibid). years take would asset reserve Caballero motne f h fnnil eeomn – r h lc thereof lack explanat the or – imbalances development financial global the of importance the of argument the is This years. Europe outperformed has time same the at and market financial the has which States, United the to directed therefore is money invest to difficult it makes sectors, certain to lending on controls int financial the time, same the At assets. financial quality

hn i as ulkl t dvriy t prflo wy rm .. de U.S. from away portfolio its diversify to unlikely also is China h scn srtg o Cia o iesf ot f olr i t encour to is dollars of out diversify to China of strategy second The Second, the Chinese financial market is underdeveloped and unable to gene to unable and underdeveloped is market financial Chinese the Second, et al.et 2006; Ito and Chinn 2007). Chinn and Ito 2006;

hapter 6. 6. hapter 87 148 This argument is well illustrated by the cry of cry the by illustrated well is argument This

ermediation, such as administrative as such ermediation, l rd ad iia ies are ideas similar and trade al ay from U.S. dollar or U.S. U.S. or dollar U.S. from ay in economic growth in recent in growth economic in se Blanchard (see ar replaced the British pound British the replaced ar U.S. dollar and appreciation and dollar U.S. most liquid and the deepest deepest the and liquid most China also signed currency- signed also China e. In June 2009, Russia and Russia 2009, June In e. rs in the foreign exchange foreign the in rs h mny t oe The home. at money the os wih emphasize which ions, bank’s effort to sustain sustain to effort bank’s aysia and South Korea. South and aysia bid). bid). arket for renminbi, renminbi, for arket as a result of the of result a as t euiis n a in securities bt t al.et rate high high rate age the the age 2005; 2005; CEU eTD Collection bonds orbonds UK i Treasuries US bonds. everyone, it For are the China, haven. safe including billion USD, or one sixth of foreign exchange reser exchange foreign sixthof one or USD, billion exchange assets. In 2007, it established the State State the established it 2007, In assets. exchange gainsoffset bills. by onlong-term los the of much and bills Treasury US in remain holdings SAFE’s cent per 50 than more or billion, $80 exceed would investments those on corporate and equities including assets, riskier into reserves of $1,800bn cent per 15 over well moved had SAFE point that By 2009). (Anderlini F and Mac Freddie providers finance mortgage US the of collapse str this continued and equities into diversifying began reserves, of mana which (SAFE), Exchange Foreign of Administration State the 2007, Except for US Treasuries, what can you Gold? You don’t what hold forgovernme canExcept Treasuries, US Japanese hold? (Sender 2009): its of spite in Treasuries buy to continue would China that said nothing can much we do. you .weguys know $2,000bn] hate the is going dollar there we is so but depreciate, to youyou [$1,000 only trillion guys. issuing (...) hate $1trillion-$2 option. We start Once Ch diversification, portfolio the to addition In 88 considerations Microeconomic 4.4.1.3 to according Commi Regulatory Banking China the at director-general a Ping, Luo i savings: national its of halfapproximately representsavings of more or % 50 – rate savings high Chinese is regions world various So far, there have been only small steps towards the portfoli the towards steps small only been have there far, So frhr atr ht ds o h dsrpny ewe savings between discrepancy the to adds that factor further A

Financial Times Financial – tends toward the colloquial. After a speech in New York he he York New in speech a After colloquial. the toward tends –

88

Investment Company (SIC), which is expected to acqu to expected is which (SIC), Company Investment ves through issuing bonds (Yam, CFA, and Wang 2007) Wang and CFA, (Yam, bonds issuing through ves n dvriid lo h mngmn o Cias fore China’s of management the also diversified ina 149

n 2007, the householdassavings the 2007, n misgivings about US finances finances US about misgivings s on its riskier assets will be be will assets riskier its on s o diversification. In early early In diversification. o annie Mae in July 2008 2008 July in Mae annie tg a lat ni the until least at ategy ssion, whose English – English whose ssion, bonds. Chinese losses Chinese bonds. GDP. The household The GDP. n ivsmn of investment and (ibid). The bulk of bulk The (ibid). ges $2,000 billion $2,000 ges the country’s country’s the bn- ire 200 200 ire nt nt s thes . . ign ign CEU eTD Collection population is covered by health insurance; and pension plans (which, plans pension andinsurance;covered healthby is population example For areas. rural poor the in even savings, precautionary social of lack The 2006). Bernanke also (see motives precautionary el s h itouto o te n-hl plc a aon te ae t same the ratio (see ofa population employed gradual total the to in also Kr increase around at policy one-child the of introduction the as well prospects growth the and reforms economic Door Open the to due risen the that suggest results Their (2004). Cao and Modigliani by tested of hypothesis the of validity The population. non-working the support sa the as ratio high a with countries than less save to tend old) and non-worki to population working of ratio low a considera with countries decisions: intertemporal the emphasizes hypothesis The (1958). Hoover in the past years. Wei and Shang (2009) offer an interesting comp interesting an offer (2009) Shang and Wei years. past the in a f explain to rate, the unable high is explain it can savings safety net the although Thus, 2). 2009, Zhang and (Wei period same the during sharply i disposable of share a as savings household 2003, since improved have China of suchexplanations a Thereare high savings rate. possible three m the for need further enhance way this and liquidity banks’ the to add 2) 2009, Zhang and (Wei 30% was income disposal household the of share a bu 2 pret f r-eieet anns apy o ny ab only to apply economically (Bernanke active population 2006). earnings) pre-retirement of percent 20 about patterns savings the that argue they Instead, level. household at hold h rsn piae udn f xedtrs n osn, dcto, n hea and education, housing, on expenditures of burden private rising the However, Chamon and Prasad (2008) argue that this explanation does not a not does explanation this that argue (2008) Prasad and Chamon However, First type of explanation builds on the dependency hypothesis a hypothesis dependency the on builds explanation of type First oee, lhuh oh eso sses n te ulc rvso o h of provision public the and systems pension both although However, 150

, only about 14 percent of the the of percent 14 about only , lementary hypothesis. They They hypothesis. lementary urther increase savings in urther safety nets in China and China in nets safety in any case, replace only anyonly case,replace in out 16 percent of the the of percent 16 out vings are employed to to employed are vings oshl svns has savings household dvanced by Coale and and Coale by dvanced ng population (youth (youth population ng China’s savings was savings China’s onetary sterilization. onetary aay 2000). aay 2000). they generated, as as generated, they ime, which led to to led which ime, in i savings in tions t cr la to lead care lth . These savings These . are guided by by guided are lack of social of lack ealth care in in care ealth ncome rose rose ncome ppear to to ppear CEU eTD Collection oiy n te aiy rfrne f os vr agtr, familie daughters, over sons of preference family the and policy possibly through raising the prices of nontradable goods such as hous as such goods nontradable of prices the raising through possibly im ratio sex rising a experiences country the as that argue market. Competitive savings by these families spills over to to over spills families these by savings Competitive market. sons their that ensure to rate savings their raise to other each Account Current U.S. Financing Deficit 4.4.2 Other Economies savings and 2007. between rate 1990 actual the of half about for account potentially could factor this and at the same time competed with it in the third markets. the markets. third in and at it the with same competed time depe Asia emerging The power. economic an to grew which China, international the apart fell standards monetary their and off turmoil in were economies cut were Afte economies economies. Asian emerging Asian is countries of East group first The the crisis, different reasons. current running been have which countries, smaller of group a from Sept 24 Economist, (The deficit saving America’s of 40% about only thes 2005 in researchers, and media as well as politicians, U.S. the model. Remembering the recent crisis, they were also reluctant also were they crisis, recent the Remembering model. proven the abandon to want not did economies Asian East the hand, other rat exchange flexible more and consumption domestic for and exports p the between balanced model economic an advocated IMF The economies. Although Chinese and Japanese current account surpluses attract the attract surpluses account current Japanese and Chinese Although The lessons drawn from the Asian crisis were different by the by different were crisis Asian the from drawn lessons The 151

balance as a result of the one child one the of result a as balance greater savings by other families, other by savings greater are competitive in the marriage the in competitive are to allow bigger exchange rate rate exchange bigger allow to increase in the household household the in increase . The single exception was was exception single The . wt sn cmee with compete sons with s nded on China’s demand demand China’s on nded e too countries provided countries too e IMF and by the affected affected the by andIMF capital markets, their their markets, capital ing. They estimate that that estimate They ing. 2005). The rest comes comes rest The 2005). account surpluses for for surpluses account e mechanism. On the On mechanism. e r the 1997-98 Asian 1997-98 the r export-led growth export-led most attention of attention most roduction for for roduction CEU eTD Collection New York Mercantile Exchange rose above $30, reached $60 by August 2005 August by $60 reached $30, above rose Exchange Mercantile York New by what Calvo and Reinhart (2002) called “fear of floating”: countrie floating”: of “fear called (2002) Reinhart and Calvo what by invoiced in dollars (McKinnon 2000).invoiced dollars (McKinnon in mos that fact the by also supported was peg dollar for case pervas from comes rate exchange the in collapse a of fear the ci when and favorable are circumstance the when appreciation the as a protection against future possible currency attacks. currencyas against possible a future attacks. protection dollar official accumulate rapidly to began countries these China, Schnabl and (McKinnon negligible become again has dollar the against eac of volatility day-to-day the 2002, By pegs. soft the to returned was only 10% of GDP. was only of GDP. 10% curr Chinese hand, other the On 18.4%. Norway and 28.9% Arabia Saudi GDP, of acc current a ran Kuwait 2008, In 2009). April (WEO, USD trillion 2.3 oil in surplus the USD, trillion 1.3 almost was 2008 to years five the Chinese cumulative Whereas GDP. to relative and size aggregate b have oil-exporters of surpluses account current the surplus, account twin surpluses play a role. They find that fiscal policy has a has policy fiscal that find They role. a play surpluses twin e oil of surpluses account current the behind factor only the not is th argue that (2009) and Hasanov balances. Arezki external their turn affect of revenues export determines increase price Oil 2008. July in $147.30 of price inflation-adjusted the 2003, During prices. oil in hike sudden rat macroeconomic The 2004). Schnabl and McKinnon (see flexibility h Es Ain cnme cniud o use h epr-e got and growth export-led the pursue to continued economies Asian East The The second group of countries consists of oil-exporters. Compared oil-exporters. of consists countries of group second The The ballooning current account surpluses of oil-exporting countries ar countries oil-exporting of surpluses account current ballooning The 152

t of East Asian commodity trade is is trade commodity Asian East of t much stronger effect on current current on effect stronger much ive liability dollarization. The dollarization. liability ive xporters. They suggest that that suggest They xporters. reserves, which serve also also serve which reserves, current account surplus in in surplus account current h country’s exchange rate rate exchange country’s h rcumstances are adverse, adverse, are rcumstances -exporting countries was was countries -exporting ionale can be explained explained be can ionale s are reluctant to allow allow to reluctant are s a barrel of crude oil on oil crude of barrel a ount surplus of 44.7% 44.7% of surplus ount oil exporters that in that exporters oil een higher in both both in higher een 2004). Similarly to Similarly 2004). to Chinese current current Chinese to e oil price increase eprice oil e a result of a a of result a e and peaked at peaked and ent surplus surplus ent slowly slowly CEU eTD Collection ak i BS eotn cutis asd lot af f eoi inf deposit of half almost passed countries reporting BIS in banks peak in the 1970s’ after oil-price shocks (The Economist, 9 Dec 2006). H 2006). Dec 9 Economist, (The shocks oil-price after 1970s’ the in peak percent forcountries). other typically (ibid). other to uses put f received funds while economies, market emerging to on “periphery” Ni Libya, as well as exporter, oil largest second world’s the especia came outflows deposit large These 19). 2008, (Wiegand 2004 of end betw quarter a than more to amounting 1980s, and 1970s the in than smaller report BIS in banks to deposits of form the in countries exporting out capital gross of share The 2006). Dec 9 Economist, The 2006, Boorman

n prhs bns hog itreire i Lno, iig hi tu ownershi 9DecEconomist, 2006). true their hiding London, in intermediaries through bonds purchase and g secretive in assets foreign their depos hold countries Eastern bank Middle and reserves exchange foreign whose Russia, or dealers, or treasuries American buy to dealers exchange foreign its uses I trace. to harder are petrodollars the nowadays that noted be must l company state-owned a World, Ports Dubai example, ow the to reservations the to due mostly is This 89 the there 1970s to are several changes. percentage 0.9-1.4 by account current affects balance fiscal the p 1 A countries. other of account current on than exporters oil of account for voluntary CFIUS review under Exon-Florio in Oct in Exon-Florio under review CFIUS voluntary for o which port ran P7O, London-based with a agreement t than more was surplus account current oil-exporters’ the terms, In contrast, Middle Eastern oil exporters made little use of ba of use little made exporters oil Eastern Middle contrast, In Similarly to the 1970s, the oil-exporting countries have been stacked been have countries oil-exporting the 1970s, the to Similarly First, there is a change in the pattern of the petrodollars re petrodollars the of pattern the in change a is there First, 89

nership by the foreign government in sensitive indu sensitive in government foreign the by nership 153 perations at six American ports. The two companies two companies The ports. American six at perations ober 2005. The sale was approved by administration administration by approved was sale The 2005. ober ctd n h Uie Aa Eiae, nee it an into entered Emirates, Arab United the in ocated

geria, and Angola. In this period, period, this In Angola. and geria, directly from American brokers brokers American from directly points (compared to 0.3-0.4 to (compared points overnment investment funds investment overnment wice in 2006 as it was at its at was it as 2006 in wice cycling (see Wiegand 2008, Wiegand (see cycling n contrast to China, which China, to contrast n nk deposits. Although, it Although, deposits. nk os eevd rm the from received lows n cutis a been has countries ing rom the “core” were were “core” the rom ercentage change in in change ercentage owever, compared owever, een 2001 and the and 2001 een t rs sharply, rose its lly from Russia, Russia, from lly in cash. In real real In cash. in flows from oil- from flows stries. For stries. p (The (The p asked asked in in

CEU eTD Collection Investment and National Security Act of 2007 (FINSA 2007 of Act Security National and Investment Corporat Unocal company oil American buy to (CNOOC) compa U.S. a to operations port U.S. sellthe would in reaction negative the of result a As 2006). Feb been has system banking its and hijackers 2001, 11, pro-U.S. strongly a have may UAE the thatalthough ocr i te ae dsrbd bv. t adts a mandates defense. U.S. or government foreign It above. described cases the in concern bipar A security. national the about concerned were unloadi and loading and bip facilities terminal running strong with wou met World Ports Dubai that deal explained administration the However, 2006. January States United 4.4.3 The 9DecEconomist, emerging(The countries 2006). among capitalization largest the had market stock its and 2006, and 2003 Saudi in prices share example, For prices. asset in increase exces in result rates interest Low policy. monetary U.S. the to currencies Kuwai their peg states Gulf other Arabia, most and Emirates Saudi region. the in arrangements exchange foreign inflat as 2004, of course the Over 2005. and 2000 early between 4% to 6% from 10- the on yield the 2000, early Since Bonds. and Notes government on yields puzzli a explain to able thus are inflows capital foreign The sm markedly is bonds, U.S. of accumulation foreign total of subset whi flows, official foreign headline-grabbing the of impact the hi points basis 150 be would yield Treasury 10-year the 2004, in bonds U.S. foreig no been there had that demonstrate (2005) Warnock and Warnock cost. hs ae tgte wt a 05 tep o a state- a of attempt 2005 a with together case, This at f h acmltd aia sas n h rgo. hs iss This region. the in stays capital accumulated the of Part The capital inflows to the United States enabled the Unite the enabled States United the to inflows capital The Congress and the media, the Dubai Port World announ World Port Dubai the media, the and Congress ny. ny. ng ships and storing the containers they transport, they containers the storing and ships ng used by group affiliated with al Qaeda (Washington Qaeda al with affiliated group by used tisan group of seven House and Senate members conte members Senate and House seven of group tisan government, the country was traversed by some of th of some by traversed was country the government, 154 ld not be responsible for security at the ports but ports the at security for responsible be not ld dtoa CIS cuiy f rnatos wih inv which transactions, of scrutiny CFIUS dditional ). FINSA addresses the main issues that were the fo the were that issues main the addresses FINSA ).

artisan opposition in Congress. Whereas the Bush Bush the Whereas Congress. in opposition artisan ion led to reform of CFIUS activities by the Foreig the by activities CFIUS of reform to led ion owned China National Offshore Oil Corporation Corporation Oil Offshore National China owned Arabia increased fourfold between fourfold increased Arabia the dollar. This way, they import import they way, This dollar. the s domestic liquidity, which fuels fuels which liquidity, domestic s ng development in the long-term the in development ng ch make a relatively small small relatively a make ch d States to borrow at lower lower at borrow to States d aller, yet still significant. still yet aller, ue is related also to the the to also related is ue , h Uie Arab United the t, stock markets of of markets stock gher. However, However, gher. year Note fell Note year ion picked up up picked ion n flows into into flows n the critics critics the only for for only Post, 16 Post, e Sept. Sept. e cus of of cus ced it it ced nded nded olve olve n n

CEU eTD Collection capi the diverted and assets financial for demand excess chronic 2005; Legg 2005; increases in oil prices. prices.increases oil in cris Asian the from drawn lesson a – crises financial the avoid to “war of accumulation controls, capital and systems rate exchange su growth export-led the are causes main the level, macroeconomic peopl old) (youth, dependent of share small and nets safety social individuals by macro-economi saving precautionary and the is micro- it level, microeconomic both on appear savings excessive the of count developing the in opportunities investment little too and savings This the 2009). on draws argument 2005) Bernanke by Apr coined term (a glut savings 1 (TIME, speech 2009 10, March a in exp Bernanke decade,” Ben Chairman a than more for inflows capital ot large some experienced and States United the it that where from result flowed saving level, the its seeking water with “Like deficient, was n sf fnnil ntuet, uh s h Uie Sae o te U the or States Blanchard 2005; Bernanke United the as such instruments, financial safe and with countries the to transferred therefore been have which savings, countri oil-exporting and Asian East the of ability limited the on at invested not are they why orelsewhere not and States United expla maybe theofconundrum portion a and role no the that argue (2006) al. et Rudebusch However, 90 "conundrum".development(2005) Alan that Greenspan termed incre rate interest small of series its started Fed the and n h scn se, t s eesr t ak h te cuuae s accumulated the why ask to necessary is it step, second the In et al. et 2007; Prasad 2007; et al.et

et al.et 2005; Caballero 2005; 2006; Smaghi 2008). The “global savings glut” led to a to led glut” savings “global The 2008). Smaghi 2006; foreign official purchases of U.S. Treasuries playe Treasuries U.S. of purchases official foreign ined by declines in long-term volatility. volatility. long-term in declines by ined 155

et al.et 2006, 2008, 2009; Gruber and Kamin Kamin and Gruber 2009; 2008, 2006, ases, the yield fell from 4.6% to 4%, a 4%, to 4.6% from fell yield the ases, 90 home. The explanations focus explanations The home. tal flows to the United States, States, United the to flows tal es to absorb the accumulated the absorb to es

chests” of foreign reserves reserves foreign of chests” e in the population. On the On population. the in e is 1997-1999 – and recent and – 1997-1999 is was abundant to where it it where to abundant was because of the missing missing the of because and eea Reserve Federal lained her advanced countries countries advanced her pported by rigid fixed fixed rigid by pported deep financial markets financial deep ries. The major causes causes major The ries. existence of excessive of existence nited Kingdom (see (see Kingdom nited vns lw o the to flow avings c levels. On the the On levels. c d little or little d global CEU eTD Collection oiy ly a ao rl i dtriig h cret con is account current the determining in role major a plays policy USDbudget or 2004. GDP in -3.6% reached low of 412.7 billion of deficit the ube a eis f oprt acutn sadl ad h 91 terror 9/11 the and scandals accounting corporate of series a bubble, (2005b, c), Ferguson (2004) and Corsetti and Müller (2006, 2007).(2006, Müller and Corsetti and (2004) Ferguson c), (2005b, beginni deficit large a into turned GDP, of 2.4% or USD billion 236.2 2000, the result, a As Pentagon. the and Centre Trade World the on attacks to response in Iraq and Afghanistan on attacks launched administration government increased an with combined were cuts tax Furthermore, Georg President of end the at recovery jobless the to similar inc rec the However, 2001, 2003. in cut in tax another and cut rebate, tax immediate tax a sponsored administration Bush incoming the and rates Reserve Federal the spending, investment and consumer the stimulate re to quick were Policymakers recession. short a into slipped economy developed legal systems and open financial markets. However, the However, markets. financial open and systems legal developed applicable be to seems liberalization financial as well financ of effect the about argument glut saving the that argues industrial for point percentage 0.10-0.49 by balance account current the 2007) find that the relationship between the budget and the current account bal current account and the between budget relationship the 2007) find the that 2006, 2008). response to the events at the beginning of the millennium. Following millennium. the of beginning the at events the to response defic budget The savings. public the in decrease a represents grow the and deficit account current the between link a draws which (C growth economic higher had Japan, and Eurozone the to contrast in which, Ito (2009) suggests that a one percentage point increase in the bud the in increase point percentage one a that suggests (2009) Ito In opposition to the global savings glut hypothesis stands the stands hypothesis glut savings global the to opposition In 156

ny o cutis ih highly- with countries for only HW Bs’ tr i 1993. in term Bush’s H.W. e ial and legal development as development legal and ial it grew to a large extent in in extent large a to grew it challenged by Greenspan Greenspan by challenged

Corsetti and Müller (2006, Müller and Corsetti argument that the fiscal fiscal the that argument ing budget deficit, which which deficit, budget ing the burst of the dot-com the of burst the large federal surplus of surplus federal large overy was sluggish and sluggish was overy twin deficits argument, argument, deficits twin spending, as the Bush Bush the as spending, lowered the interest interest the lowered ist attacks, the U.S. U.S. the attacks, ist spond. In order to to order In spond. ized countries. He He countries. ized get balance raises raises balance get h 91 terrorist 9/11 the ng in 2002. The The 2002. in ng ance holds onlyance holds aballero luding an an luding et al.et

CEU eTD Collection private investment responds significantly (Corsetti and Müller 2006) and the c and and(Corsetti significantly the Müller 2006) private responds investment ak’ fot o te tblzto o te iaca sse, t system, financial the of stabilization the for effort banks’ began prices house U.S. The bubble. housing U.S. the of bursting become bank holding companies in order to stay in b in stay to order in companies holding bank become government S-shaped budget balance is a and (Corsetti the balance trade inve U.S. major two last the for permission granted big of era the to end an was 2008 21, September 92 glo the on review literature more detailed a For 91 de budget or spending government either to shocks of impact external i which States, United the In trade. to open are that economies for and Bear Stearns and Merrill Lynch sold at fire-sal at sold Lynch Merrill Stearnsand Bear and culminating with the collapse of the Lehman Brothersa 15Sep Lehman only later week culminating of the on the collapse with Sep 7 on Corporation) Mortgage Loan Home (Federal Mac Freddie and National (Federal Mae Fannie enterprises government-sponsored the with starting 2008, September of week first the during intensified rescued. be to had and collapsed institutions banking European and U.S. se banking entire for funding the as crisis, liquidity the into turned de the weeks, Within mortgages. subprime by backed securities whi funds, hedge its of two of bailout – banks investment U.S. five top Be the with earnest in started crisis mortgage subprime The 2008 and quarter -4.6%(BEA). the first in of 2009 the in -5.4% of contraction a experienced economy U.S. The II. War World wa growth economic world the Nevertheless, liquidity. additional with governments and banks Central collapse. lending the to led markets spreadi panic the collapse, Brothers Lehman the Following economy. it afterwards sector, financial the within contained was crisis The bankruptcy of the Lehman Brothers was a watershed. Whereas Whereas watershed. a was Brothers Lehman the of bankruptcy The i came deficit account current the of development the in turn The

bal imbalances, see Chapter 6. 6. Chapter see imbalances, bal e prices. prices. e investment banks in the Wall Street, as the Federal the as Street, Wall the in banks investment stment banks – Goldman Sachs and Morgan Stanley – t – Stanley Morgan and Sachs Goldman – banks stment usiness. Previously, Lehman Brothers had been liqui been had Brothers Lehman Previously, usiness. 157

ar Stearns’ – at the time one of the the of one time the at – Stearns’ ar e upie otae crisis mortgage subprime he flation of the housing bubble housing the of flation ucl sra t te real the to spread quickly the government rescue of rescue government the gments dried up. Several up. dried gments to decline in 2006-2007. 2006-2007. in decline to ls oe t tae the trade, to open less s Mortgage Association) Association) Mortgage flooded the economies economies the flooded s the slowest since the the since slowest the s ficits is limited, while limited, is ficits nd Müller 2007).nd ch were involved in in involved were ch ng in the financial financial the in ng Despite the central the Despite up to that point the point that to up ebr 08 and 2008 tember fourth quarter of quarter fourth 20 wt the with 2006 n orrelation of the oforrelation the tember. Reserve Reserve 91 92 dated dated

o o CEU eTD Collection billion USD (U.S. Bureau of Economic Analysis). The United States States United The Analysis). Economic of Bureau (U.S. USD billion en eln te ikes ses o oeges n hsbe l been has and foreigners to assets riskless the selling been 4.5 Conclusion 4.5 an to rose which Japan, was creditor largest world’s the of role Unit the replaced that country The terms. stock and flow the both in oeg-we ast i te ntd tts tre ngtv ad reac and negative turned States, United the in assets foreign-owned as U.S.-owned a difference between position, net internationalU.S. investment poi breaking Further 1991. of exception single a with since, ever GDP of 3.4% of deficit into slipped balance account current its when failed through regulation, of there lack fromthe ranging that emphasize to important is it However, 93 the since deficit of the 2001(BEA). was fourth quarter the smallest quar first the In 2008. in GDP of 4.89% to 2006 in GDP of 6% of peak the from h goa iblne (Caballero imbalances global the large capital flows to the United States and the creation of b of creation the and States United the to flows capital large assets of shortage The hand. other the on scarcity asset global t on hypothesis glut savings global the on build explanations The 2008). capital flows to the United States were seeking safe invest safe seeking were States United the to flows capital hous lifted and rates interest lowered in flooding flows capital thrust capital the of result the was crisis financial the Thus, (Caballero h Uie Sae, ne h wrds ags ceio, eae a became creditor, largest world’s the once States, United The iial t te al 19s eeso, h US cret con de account current U.S. the recession, 1990s early the to Similarly There is a growing body of literature that draws a link betw link a draws that literature of body growing a is There et al. 2009). 93

t al.et 2008, 2009; Dunaway, 2009; Smaghi 2008, Wolf Wolf 2008, Smaghi 2009; Dunaway, 2009; 2008, monetary policy to financial innovation and deregu and innovation financial policyto monetary r mn atraie xlntos f h financial the of explanations alternative many are 158

ment, the U.S. financial sector has sector financial U.S. the ment, eft holding “toxic waste” assets assets waste” “toxic holding eft e prices. Furthermore, since the the since Furthermore, prices. e in the world economy triggered triggered economy world the in ubbles (Caballero ubbles pn h Uie Sae. The States. United the upon economic power by the 1970s. 1970s. the by power economic nt came in 1986, when the the when 1986, in came nt een the financial crisis and crisis financial the een ed States in its traditional its in States ed and has remained there there remained has and was thus the net debtor net the thus was e te au o -21.8 of value the hed he one hand, and the and hand, one he e dbo i 1982, in debtor net ii ws reduced was ficit sets abroad and et al.et ter of 2009, of ter lation. lation. 2008). crisis, crisis, CEU eTD Collection budget deficit, i.e. a decrease in the public savings. Finally, the U.S. admini U.S. Finally, the savings. the public decrease in a budget deficit, i.e. f contraction fiscal for call Their deficit. budget U.S. ballooning USD, making the world’sbillion creditor. Japan largest beyond its means and the surplus countries were able to pursue to able were countries surplus the and means its beyond a China Japan replaced time this However, 2006. in GDP percentof the U.S. financial assets. Thus, the United States enjoyed cheap enjoyed States United the Thus, assets. financial U.S. the the goods, foreign of imports cheap to markets its opened States interdependence of web complex a into economies world the weaved Euroarea also initially and oil-exporters economies, Asian East gl the of side surplus the on regions Further deficit. trade U.S. the deficits argument, which draws a link between the current account account current the between link a draws which argument, deficits climate cuts and createdchanges. regulatory the tax by Reagan t due inflow capital the by induced was deficit account current U.S. haven” “safe the to adhered 1981-1984, administration, Reagan first the during pointe countries European and Japan deficit. trade U.S. the reduce German yenand Japanese the to relation in depreciation dollar U.S. Pl 1985 in employed partly was strategy This down. dollar the talk exchange foreign the in intervene to suggested and 1985) Cooper 1985, (Krugman t with balance trade associated deteriorating the Some as Washington. in re assets net Japanese year, that In 1986. in GDP of percent 4 than w 1981, since surplus in been has balance account current Japanese The urn acut eii rs t hsoial upeeetd values unprecedented historically to rose deficit account current strategy. strategy. How to deal with the imbalance was a matter of heated debate among scienti among debate ofa heated matter was the imbalance with How deal to These debates re-emerged in the first decade of the new mille new the of decade first the in re-emerged debates These 159

. The global imbalances thus thus imbalances global The . the export-led development export-led the credit and was able to live live to able was and credit surplus countries imported countries surplus and reached the low of 6 6 of low the reached and aza Accord. However, the However, Accord. aza s the largest contributor to to contributor largest the s ud upr i te twin the in support ound mark did not significantly not did mark obal imbalances included included imbalances obal ached the value of 129.8 of value the ached deficit and the growing growing the and deficit o favorable investment investment favorable o d their fingers at the the at fingers their d nnium, when the U.S. U.S. the when nnium, Wees h United the Whereas . he appreciating dollar appreciating dollar he hen it peaked at more at peaked it hen stration, especiallystration, view that the that view market or market sts as wellsts CEU eTD Collection policies that would enhance the development of their financial mar financialtheir of development the enhance would that policies

In contrast stands the global savings glut hypothesis (Bernanke hypothesis glut savings global the stands contrast In g andconsumer the both in cuts suggest and savingsrate, U.S. low to out and C the by balance advanced is argument this 1980s, the in Japan to Similarly account current the between link a draws hypothesis China and other developing countries are advised to liberalize their liberalize to advised are countries developing other and China U.S. the on nothing do to is recommendation policy the 1980s, the in States T it. absorb to able are markets financial liquid and deep whose excess these directs markets financial underdeveloped their with developing in savings of excess the which to according 2009), Ferguson thefluctuationseras trade in globalization. balance of two in cha two following the whereas 6, Chapter in tested formally are There are two competing explanations of the global imbalances. global the of explanations competing two are There 160

2005, Caballero Caballero 2005, savings to the United States, United the to savings hus, similarly to the United United the to similarly hus, pters examines the cyclical cyclical the examines pters kets. These two hypotheses two These kets. capital account and adopt and account capital hinese officials who point point who officials hinese First, the twin deficits twin the First, overnment spending. spending. overnment the budget balance. balance. budget the countries combined countries at Instead, part. et al.et 2006, 2006, CEU eTD Collection balance and real income over the business cycle is taken as an e an as taken is cycle business the over income real and balance p of time rate consumers’ the that assumption the under balance, behavior of the trade balance can be compatible with perma with compatible be can balance trade the of behavior c the Here, 1995). Rogoff and Glick 1993; Razin 1991; Mendoza (see balance balance. payments. Current account represents national savings or borrowing or savings national represents account Current payments. Application of Formal Methods to History. Section ' Section History. to Methods Formal of Application demand shocks. demand shocks. correla negative The supply. aggregate an by induced is increase deteriorati a to and demand aggregate the by induced is increase the in improvement an to leads income in increase transitory a hand, sam the by increase consumption and income because balance trade perm in increase an model, this Within equal. are rate interest hw ta tastr ad emnn sok t icm hv differe have income to shocks permanent and transitory that shows i variations cyclical and income in growth long-term both explain

Introduction 5.1 oenet. hr ae w cmeig yohss n h intertempor househol the in of hypotheses competing choices two are intertemporal There governments. of outcome an is it such as and world 94 CHAPTER– 5 INCOME SHOCKS TO TRADE BALANCEUNDER TH A revised version of this chapter was published in waspublished chapter this versionof A revised el uies yl mdl calne ah ad ru ta re that argue and Sachs challenge models cycle business Real Using a model incorporating permanent income theory of consumption, Sa consumption, of theory income permanent incorporating model a Using h itreprl rd i maue b te urn acut f t of account current the by measured is trade intertemporal The

GOLDSTANDARD Cliometrics'

Historical Social Research. An International Journa International An Research. Social Historical 161

35, no 3. (2010): 412-27. 412-27. 3. (2010): no 35, 94 nent productivity shocks, and not not and shocks, productivity nent

anent income does not affect the the affect not does income anent vidence for the dominance of dominance the for vidence on of the trade balance if the the if balance trade the of on e proportion. On the other other the On proportion. e s s eeec ad h world the and reference n income and the trade trade the and income n tion between the trade trade the between tion nt effects on the trade trade the on effects nt vis-à-vis al theory of the trade trade the of theory al al supply shocks can can shocks supply al trade balance if the the if balance trade e aac of balance he the rest of the the of rest the s frs and firms ds, ountercyclical chs (1981) (1981) chs l for the for l E CEU eTD Collection r-ol Wr dt o svn uoen onre: emr, Franc Denmark, countries: European seven of data I War pre-World emnn ad rnioy noe hcs o h tae aac ae cons are balance trade the to shocks income transitory and permanent aac rsos t te rnioy itracs o noe a do was income to disturbances transitory the to response balance unabl are policy, monetary or fiscal trade(Cardiacountercyclicality the balance 1991). of in changes as such shocks, by extended is model The disturbances. demand the with necessarily empirical studies for the post-World-War II period is mixed. mixed. is period II post-World-War the for studies empirical Sweden. and Australia of economies smaller the in not but Canada ro a be to seems balance trade the of behavior countercyclical trans cause that shocks by mostly explained is balance trade conc He Sweden. and Canada Australia, Kingdom, United States, United the a demand to balance trade of response the examines (1998) Kim 1992, to Japan. Japan. effects these whereas balance, account current U.S. on effects statistically has income of component permanent that concludes (1999) O countries. G-7 the of account current the in variation the explaining temporary States, United the of exceptions the with that suggest a fluctuations shocks transitory account country-specific the current by the predominantly explained that document (2003) Kano Hor and and Veselkova (2001) by Hoffman countries Baltic and Four Visegrad for and (2000) suggest that the transitory income shocks are responsible for mos for responsible are shocks income transitory the that suggest e income the on is emphasis The Sweden. and Norway Italy, Germany, nutilzd onre b Km 19) fr ie uoen cnme by economies European five for (1996), Kim by countries industrialized Using long-run historical data, which span from the last third of of third last the from span which data, historical long-run Using The main aim of this chapter is to implement the intertempor the implement to is chapter this of aim main The 162

itory changes in income. The The income. in changes itory are statistically significant in in significant statistically are ut etr i te .. and U.K. the in feature bust The prevalence of the trade trade the of prevalence The shocks play a larger role in in role larger a play shocks t of the variation in the trade trade the in variation the of t Le n Cin (2006) Chinn and Lee . al considerations on the on considerations al n the contrary, Hossain contrary, the n the claim that demand that claim the the nineteenth century century nineteenth the insignificant long-run insignificant The evidence of the the of evidence The ffects and thus only thus and ffects cumented for four four for cumented nd supply shocks in in shocks supply nd drd Te results The idered. t epan the explain to e , ra Britain, Great e, Miljkovic Miljkovic ludes that the the that ludes ah (2008). vath t al.et re

CEU eTD Collection balance. On the other hand, permanent shocks are the main driving fo driving main the are shocks permanent hand, other the On balance. free capital flows at the cost of independent monetary policy. of independentfreeat policy. thecapital cost monetary flows ex fixed (mostly) of stability the enjoyed countries standard ra 1961b 1961a, Mundell (see exchange mobility capital free and policy monetary among tradeoff imply and trinity” “impossible or These system. monetary international of goals desired three of out res a as variables economic real the influence to authorities little significant thelittle trade effects on balance. under DemandShocks Gold and Standard Supply 5.2 sta are 3.Themethodology finalresults section section presented in concludes. and the gold the under mechanism adjustment the and shocks supply and demand standard from 1860 and on a standard 1860and from Britai I.Great War Word the of outbreakthe until lasted and 1870 in establishment ofestablishment Scandinavian monetary 1875. Norway in joined union. i gold on went Sweden and Denmark Finally, Switzerland. and Belgium tog Union Monetary Latin the of creation the following 1873, in standard gold a Italy unification. the following 1871, in standard gold the Gresham adopted of illustration an – circulation gold, of overvalued out of coins silver price undervalued the lower sufficiently not did mint, the of

h rs o te hpe i ognzd s olw. eto 2 discuss 2 Section follows. as organized is chapter the of rest The The classic gold standard as an internationally recognized monetar recognized internationally an as standard gold classic The ifrn mntr rgms moe ifrn rsrcin o t on restrictions different impose regimes monetary Different de facto gold standard since 1717, when Isaac Newton, as master asIsaac master Newton, since gold 1717,when standard 163

ult of the inevitable choice of two two of choice inevitable the of ult change rates and the benefits of of benefits the and rates change are known as a “trilemma” a as known are e tblt, independent stability, te n was on a full legal goldlegal full a on was n , 1962). During the gold the During 1962). , rce of income but have have but income of rce he ability of monetary monetary of ability he d rne dpe the adopted France nd hc doe the drove which y regime emerged regime y s a. Germany law. ’s 17 uo the upon 1873 n s h potential the es dr. The ndard.

te with ether CEU eTD Collection base and the resulting changes in price. baseprice. changesresulting in and the gold flows lags between to sluggish is due price-specie-flow mechanism self-equilibrating through the change in the relative prices. Th prices. relative the in change the through self-equilibrating o balance Thus, opposite. the experiences surplus trade the with pro foreign the for demand the lowers and down, prices the drives which g less result, a As goods. imported the for payment a as country expor it than goods more imports it that means it deficit, trade If only. gold of circulation the with countries two Assume Hume. David price-spec the of working the through occurs adjustment macroeconomic sta gold of model conventional the to According 1989). Eichengreen or 1984 Bordo overview an (for markets commodity or money capital, in occurs shock a relatively fast adjustment to shocks.a to adjustment relatively fast r short the in prices and rates interest foreign with consistent r interest and prices the As 29). 1999, (Bordo stocks monetary the for determi is level price the gold, of price nominal fixed the given the re the determine market commodity the in and conditions supply and demand market money the between interactions the by determined pr the Here, 1992). Floyd and Dick 1987; Hubbard and Calomiris 1976; Zecher 1989; McCallum 1979; Barro 1978; Niehans (see markets capital and goods od tnad Hwvr MCoky n Zce (96 fud oiie correla positive found (1976) Zecher and McCloskey However, standard. gold l price the in correlation inverse an predicts flow-mechanism Fir mechanism. price-specie-flow the with inconsistencies to out

A competing modern approach to the gold standard assumes international assumes standard gold the to approach modern competing A The empirical evidence on adjustment-related outcomes under the g the under adjustment-relatedoutcomes on evidence empiricalThe hr ae w cmeig xlntos f h mcocnmc adjustm macroeconomic the of explanations competing two are There 164

un, the modern approach predicts predicts approach modern the un, ts. The gold flows to the other the to flows gold The ts. ned by the demand and supply supply and demand the by ned vl o to onre o the on countries two of evels e adjustment predicted by the the by predicted adjustment e old circulates in the country, the in circulates old f payments disequilibria are disequilibria payments f st, the simple price-specie- simple the st, , changes in monetary monetary , changes in ts anan levels maintain ates commodity market: market: commodity al price of gold and, gold of price al of the literature, see see literature, the of ducts. The country country The ducts. old standard points standard old a country runs the runs country a efo mdl of model ie-flow McCloskey and and McCloskey ent after the the after ent ly integrated integrated ly ice level is is level ice ndard, the the ndard, in, i.e. tions, CEU eTD Collection production level. Solely temporary effects of demand shocks on output ar output on shocks demand of effects temporary Solely level. production domestic money supply. for and gold of outflows or inflows of impact the negate to tried often ba central the contrary, the Quite 1984). McGouldrick 1984; Jonung 1962; Ford 1984; Pippenger 1953; automat Whale 1959; (Bloomfield adjustment external around as oriented bankers central of image the against argue scholars the up speeding way this economy, the deflate and rate interest centr the deficit, a of case In economies. their contract or expand f signal mere a as serve gold would gold actual of for movements Small need minimized. the game), the of rules the by played they for their in changes as direction same the in credit domestic mechanis flow price-specie the to counterevidence be to have not assig role large the play to t small too in be to appear gold century of flows actual the Second, Kingdom. United the and States indic price wholesale of correlation significant a nations and between commodities as regions between high equally arbitrage, identifying restriction in the model below. An open economy is thus thus is economy open An below. model the in restriction identifying perman from shocks demand preventing level, normal its to returns beca vertical is supply aggregate long-run The demand. aggregate utiliz capacity in variations short-run the reflecting sloping, aggr short-run The demand. therefore and balances money real raise re space, price-output in sloping downward is demand aggregate the Withi chapter. this of departure of point methodological the is which s demand-aggregate aggregate the of discussion the in account into taken The different assumptions of the competing approaches to the gold s gold the to competingapproachesthe of assumptions different The 165

ned to them (ibid, 187). This does This 187). (ibid, them to ned eign reserves (in other words, if if words, other (in reserves eign ation in response to changes in in changes to response in ation adjustment. However, many many However, adjustment. for internationally traded traded internationally for m. If central banks adjusted banks central If m. al bank would increase an an increase would bank al n wo olwd rules followed who ons n the AD/AS framework, AD/AS the n flecting that lower prices prices lower that flecting exposed to two types of types two to exposed use capacity utilization utilization capacity use es between the United United the between es egate supply is upward upward is supply egate oeet wud be would movements eign exchange on the the on exchange eign or central banks to to banks central or ently affecting the the affecting ently e used as the main the as used e he late nineteenth nineteenth late he tandard have to be to have tandard upply framework, framework, upply 1984; Dutton Dutton 1984; nks nks CEU eTD Collection production and shifts between monetary and non-monetary holdings (see Bor (see holdings non-monetary and monetary between shifts and production supply disasters. due of natural to output out potential raises permanently that shock technology favorable a of Examples of changes. policy fiscal or shocks monetary include Examples shocks shocks. supply and shocks demand disturbances: macroeconomic which permitted the extraction of goldwhich permitted of the from extraction lower-quality ores. cyanide the of invention the by gained was effect similar A 13). 1996, product gold world in increase tenfold a about brought 1851 in Australia and Cali in discoveries gold The 1897. in Canada Klondike, in or 1884 in Africa Bat near Australia in e.g. continents, other in also discoveries gold there However, 1848. in California Coloma, in discovery gold e.g. States, market silver) also (but gold world’s to shocks supply the of Most sour two from derive gold monetary for demand or of supply the to Shocks economy. aregiven the by international capit integrated internationally and supplygold elastic highly securitie traded internationally on return of rates the or supply t bank central the of ability limited very a predicts approach mechanism. price-specie-flow the with consistent is view This su gold inelastic assume to necessary is it rates, interest aggre the influence to able be to authority monetary the for order supply an Calomiris (see money real monetary influence the authorities to implications have assumptions in differences The shocks. monetary of gold, additional gold results in an increased price level. Given the Given level. price increased an in results gold additional gold, of h mi dfeec bten w apoce t gl sadr i r is standard gold to approaches two between difference main The The adjustment of the shocks is self-equilibrating. In case of case In self-equilibrating. is shocks the of adjustment The 166

pply and sticky commodity prices. prices. commodity sticky and pply o influence the aggregate money money aggregate the influence o al and commodity markets, these markets, commodity and al On the other hand, the modern modern the hand, other the On s. Under the assumption of a a of assumption the Under s. s originated in the United the in originated s put or a reduction in the in reduction a or put an increase in the supply the in increase an gate money supply and and supply money gate us i 15, n South in 1851, in hurst fixed nominal price of price nominal fixed n h aiiy f the of ability the on process in the 1880s, 1880s, the in process supply shocks include include shocks supply d Hubbard 1987). In d Hubbard 1987). were significant significant were ion (Eichengreen ion do 1999, 29-31). 29-31). 1999, do fornia in 1848 in fornia ltd o the to elated demand ces: gold ces: CEU eTD Collection Europ I. War World the during observed was This country. peace the acc current The rate. interest every at savings their lower consump their smooth to try individuals As future. postwar the in amounts component nonwar private, for goods of scarcity a Itcreates temporary. temporary wa the of for nature periods very wartime the with of associated significance is The purchases government Klein 1994,8). 1902(Kaminskytheto Boerand War from 1899 Br the in increase an is shock fiscal the of example typical tax income the over dispute a with other the and 1835-36 in slaveowners compe with associated one – deficits non-war major two only found He changes temporary with associated was I War World the through 1700s Gr for deficits budget of bulk that argues (1987) Barro Similarly, Britai Great for documented was ones permanent than deficit trade gove – war-time especially – temporary of effects Larger Rog and (Obstfeld future the in surplus account current the and today country the result, a As future. the to it of part shift and today the spread to the When abroad shocks. demand of borrow example textbook another are individuals shocks Fiscal expenditures, its increases the holdings risemonetary ofgold response the price real gol in in monetary to to similar a in works gold produc gold by areoffset gold on countries of number the for in increase demand to shocks the of adjustment Thenongol the in productivity in increase an of effects deflationary thegold of amount monetary the restores equilibrium. r The 30). 1999, (Bordogoldnon-monetary monetary fromto shift aencourages and p and profits reduces way this and falls price real the gold, 167

ount deteriorates. Opposite is true fortrue is Opposite deteriorates. ount roduction in the gold mining sector sector mining gold the in roduction itish government purchases during during purchases government itish consumption today relative to the the to relative today consumption rnment spending changes on the the on changes spending rnment d sector of the economy or an or economy the of sector d runs a current account deficit deficit account current a runs . a i epce t be to expected is War r. eat Britain from the early early the from Britain eat tion and shifts from non- from shifts and tion (he 18, 1987). 1986, (Ahmed n burden of higher taxes taxes higher of burden e, led by Great Britain, Great by led e, off 1996, Chapter 1). Chapter 1996, off in military spending. spending. military in nsation payments to to payments nsation in 1909-10. Thus, a Thus, 1909-10. in tion over time, they they time, over tion s of shocks to to shocks of s d. d. government government way. The The way. eversal in in eversal CEU eTD Collection hnmnn A rdtoa ve asrs ht h idsra rvlto b revolution industrial the that asserts view traditional A phenomenon. a of net the c debtor United from accelerated States a to major the transition On heavily. borrowed and abroad assets its of part major liquidated lower prices. the in equilibrating right, the to curve supply long-run the shifts positi a as works technology new the Thus, output. for path rising a to pr produc marginal the on factor positively depends which investment, stimulates total of level the increases improvement technological epne f h tae aac t praet n tastr sok. T shocks. transitory and permanent to balance trade the of response balance trade of models intertemporal competing two are there disc already As methodology. the presents section next The manner. introduce were analysisshocks supply theand demand in potential the used on focused concepts discussion above basic The The standard. gold 1989forFrenchRush of the the study nineteenth data). century r interest short-term the cause and increase will funds demand loanable the consumption, current on harvest poor a of effects the smooth cla A output. on effects transitory harvest also agricultural have failed may a is shocks shock Supply supply negative temporary iron and transportation (Crafts andtextiles, Harley 1985,Crafts 1992,2000). chang technological a of result the as phenomenon, narrower a was tha argue and revolution industrial the during growth output of rates Harl and Crafts by challenged is revolution industrial the of view This 1969). Landes and 1971 (Ashton society the and economy the of transformation txbo eape f h spl sok s fvrbe ehooy s technology favorable a is shock supply the of example textbook A h pro udr td cicdd ih h idsra rvlto, suppl a revolution, industrial the with coincided study under period The 168

ates to rise (see Denslow and and Denslow (see rise to ates A hueod atmt to attempt households As . point of higher output and output higher of point , which predict a different different a predict which , ey, who estimate modest modest estimate who ey, t the industrial revolution industrial the t ussed in the introduction, introduction, the in ussed oductivity (TFP). This This (TFP). oductivity the other hand, the war war the hand, other the ve supply shock, which which shock, supply ve e in few industries – – industries few in e t of capital, and leads leads and capital, of t i a non-technical a in d e emnn and permanent he sc xml o a of example ssic reditor nation. reditor nation. ogt radical a rought for short-term short-term for during the during ok A hock. broad y-side CEU eTD Collection the periods, during which the countries were on the gold standard. the the countries goldperiods, during which were standard. onthe corr roughly periods The Germany. for 1880 and Denmark for 1870 Norway, for for 1861 Britain, Great and France for 1850 follows: as availability ac varies period beginning The 1913. is data yearly the of period end obt is data The models. intertemporal with line in interpreted and economy the of propensities investment and saving the reflects the Using effects. scale for control to order in GDP to exports bal Trade GNP. or GDP real of log natural a as measured W the before countries European seven the of (TB) balance trade onthe tradeare characterized incometo and balance their equa by effect Results Data, and Methodology 5.3 asonly demand onoutput disturbances. a impact temporary di supply as interpreted are output on impact permanent a with proc (1989) Quah and Blanchard by isolated are components transitory X eemnsi cmoet ad G and components deterministic income. to ratio a as expressed U G X t (∆y = k t k t + = µ I rely on the model proposed by Kim (1996), where permanent and and permanent where (1996), Kim by proposed model the on rely I This part examines how transitory and permanent components in incom in components permanent transitoryand how examines part This ∑ t k ∆b , ∞ = 0 t )′ and − (5.1) (5.1) U t (u = p t u , t k t s r mtie o coefficients. of matrices are ’s )′ ∆ where denotes the first difference operator, operator, difference first the denotes

y t 169 s h ra icm and income real the is

ance is measured as a ratio of net net of ratio a as measured is ance ained from Mitchell (1976). The (1976). Mitchell from ained trade balance as a ratio to GDP to ratio a as balance trade sturbances and shocks with with shocks and sturbances u p Italy and Sweden, 1865 Sweden, and Italy t empirical results can be be can results empirical , , orld War I. Income is is Income I. War orld b denotes the structural structural the denotes tion (5.1). (5.1). tion t s h tae balance trade the is edure, where shocks where edure, odn t te data the to cording transitory shocks shocks transitory µ s vco of vector a is e (Y) affect the affect(Y) e espond with with espond CEU eTD Collection balance series are considered to be integrated of order one. In de to order of integrated one. order are balancebe considered to series oiy r uooos hne i cnupin Eape o spl dist supply of Examples consumption. in changes autonomous or policy analysis. Therefore, lag length 1 was chosen – similar prefere similar – chosen was 1 length lag all Therefore, analysis. not would 0 lag However, 0. length lag the indicated criteria case In Germany. of except countries the all for indicated residua and residuals in correlation serial for test multiplier lag the as such criteria, selection order lag various consider I not rejected only in the case of trend and intercept. Based on thes on Based intercept. and trend of case the in only rejected not inter and trend no of case the in only rejected not was root unit the of Fra and Denmark of series balance trade the were exceptions balanc trade and income the for root unit a of presence the reject reported (not roots unit dete have balance to trade and income employed of measures was roots unit for test Dickey-Fuller Augmented includeprice or technological oil shocks. improvements income in changes generatingpermanent shock transitorychanges income. in output. Examples of demand disturbances would thus include changes in monet in changes include thus would disturbances demand of Examples output. temp have shocks demand aggregate and disturbances supply by caused t implies curve supply aggregate long-run vertical a where supply/aggrega aggregate textbook the of (1989) terms Quah in disturbances and Blanchard income. real on shock transitory a of effect restricti identifying long-run the where methodology, (1989) Quah and The Blanchard-Quah methodology requires stationarity (Enders 1995, 332). 332). 1995, (Enders stationarity requires methodology Blanchard-Quah The The transitory and permanent components in income are isolated using isolated are income in components permanent and transitory The 170

and and

u t t denotes the structural shock generating shock structural the denotes hat permanent shocks to output are output to shocks permanent hat l normality test. Lag length 1 was was 1 length Lag test. normality l of Germany, standard lag length length lag standard Germany, of exclusion Wald tests, Lagrange tests, Wald exclusion nce. In the former, the presence presence the former, the In nce. nce of lag length 1 to 0 can be be can 0 to 1 length lag of nce e data for all the series. Two series. the all for data e e ead A/D model (AS/AD) demand te e results, all GDP and trade trade and GDP all results, e w o rce wt the with proceed to ow cept, in the latter it was it latter the in cept, here). I was unable to to unable was I here). on is defined as a zero a as defined is on termine the lag order, the lag order, termine mn wehr the whether rmine orary effects on on effects orary interpret these these interpret racs might urbances the Blanchard Blanchard the ary or fiscal fiscal or ary CEU eTD Collection oe: oun - sos h pooto o te varia the of proportion the shows Y-P Column Notes: explained by one of the shocks because the two sum to 100%. Years a Years100%. p to sum two the because shocks the of oneby explained the only variable each for provide I income. to shocks transitory hw te rprin f h vrac i ra icm epand by Column explained income. income real in variance the of proportion the shows 5.1: Variance 1850-1913Table Decomposition, the nineteenth in output I century. lag theall Therefore, c for use estimation 1 in tr and permanentof analysis their and (1998) Nye and Keating in found income. Numbers in parentheses refer to one standar one to refer parentheses in Numbers income. income. Column T-B shows the proportion of the vari the of proportion the shows T-B Column income. Germany Germany Denmark Country Years ahead Y-P TB-T TB-T Y-P ahead Years Country Norway Norway Sweden Sweden Britain Britain France France Great Great Italy Italy h rsls f h vrac dcmoiin r rpre i Table in reported are decomposition variance the of results The 10 93.62 (0.0496) 89.96 (0.0159) (0.0159) 89.96 (0.0496) 93.62 (0.0182) 88.22 10 (0.0192) 99.54 (0.0108) 50.00 10 (0.0383) 49.33 (0.0098) 94.45 10 (0.0292) 95.43 (0.0120) 96.52 10 (0.0290) 99.91 (0.0147) 95.05 10 (0.0523) 84.64 (0.0445) 98.68 10 (0.0300) 95.14 10 4 93.62 (0.0496) 89.96 (0.0158) (0.0158) 89.96 (0.0157) 91.39 (0.0496) 93.62 (0.0182) 88.22 (0.0492) 94.17 (0.0181) 88.24 4 (0.0192) 99.54 (0.0108) 50.00 2 (0.0191) 99.54 (0.0108) 49.99 4 (0.0381) 49.92 (0.0098) 94.45 2 (0.0351) 58.03 (0.0098) 94.48 4 (0.0292) 95.43 (0.0120) 96.52 2 (0.0292) 95.65 (0.0120) 96.56 4 (0.0290) 99.91 (0.0147) 95.05 2 (0.0290) 99.91 (0.0146) 96.17 4 (0.0523) 84.64 (0.0445) 98.68 2 (0.0517) 86.31 (0.0434) 98.62 4 (0.0300) 95.16 2 (0.0299) 95.54 4 2 1 99.74 (0.0183) 99.21 (0.0164) (0.0164) 99.21 (0.0183) 99.74 1 (0.0096) 94.81 (0.0287) 98.30 1 (0.0397) 98.51 (0.0290) 98.17 1 1 94.94 (0.0466) 99.37 (0.0142) (0.0142) 99.37 (0.0466) 94.94 1 1 97.75 (0.0452) 99.73 (0.0150) (0.0150) 99.73 (0.0452) 97.75 1 (0.0106) 49.93 (0.0291) 84.36 1 (0.0118) 99.46 (0.0289) 99.96 1 TB-T shows the proportion of the variance in trade balance explained explained balance trade in variance the of proportion the shows d error. error. d 171 ance in trade balance explained by transitory shock transitory by explained balance trade in ance c i ra icm epand y emnn sok to shocks permanent by explained income real in nce

head denote the number number the denote head ansitory shocks in real real in shocks ansitory retg o variance of ercentage emnn sok to shocks permanent 5.1. Column Column 5.1. ountries. ountries. Y-P s to to s by by

CEU eTD Collection lt te mus rsos fnto o te el noe o hc 1 (sh 1 shock to income real the of function response impulse the plots and a further increase in the third year,effectsand The die third a out. the fluct further increase the before in byfollowed increaseis An income. the initiallyincreases shock In shock. transitory the of effects the in fluctuation a is there incom the increases shock transitory the and changes effect the the reduces initially it Germany, and France of case In income. Britai Great Denmark, of case the In effects. mixed has shock Italy, and foraccount the variation. less than where 60% they of vari of 85% than more for account changes permanent where France, count these of income real the in variation of 95% approximately for chapermanent 2-year Within horizon, shocks.by permanent explained va the of portion major that show results These years. in steps of the shock 2(permanent). balance trade the of function response impulse the plots figure income) on effect permanent with (shock 2 shock to and income) on effect approximately trade variationchanges its 50%explain in of bal the income to I is exception single The balance. trade Swedish the in % 91.39 Norweg the in % 88.24 German, the in % 94.48 British, the in % 96.56 French, the ba trade Danish the in movements % 98.62 for account changes transitory i to shocks transitory by explained is balance trade in variance standard deviation innovations. Figures for each country are organized in pairs. The pairs. in are organized country each Figures for innovations. standard deviation iue . pos h acmltd epne o icm ad rd t s to trade and income of responses accumulated the plots 5.1 Figure p major the chapter: the of finding important shows TB-T column The A permanent shock increases the income permanently in all the all in permanently income the increases shock permanent A 172

n and Norway, it increases the the increases it Norway, and n ncome. Within 2-year horizon, 2-year Within ncome. to the shock 1 (temporary) and (temporary) 1 shock the to e. In case of Italy and Sweden, Sweden, and Italy of case In e. income but in the second year second the in but income case of Sweden, the transitory transitory the Sweden, of case a reduction in the second yearsecond the in reduction a taly, where the transitory transitory the where taly, ine n el noe is income real in riance ation in the real income, income, real the in ation ries. The exceptions are exceptions The ries. nges in income account incomein nges countries. A transitory transitory A countries. c wt temporary with ock uation is even is uation more lance, 96.17 % in in % 96.17 lance, ance. Te ih side right The . tructural one one tructural rin f the of ortion left figure left ian, and ian, CEU eTD Collection 1850-1913 Figure Responses, Impulse 5.3: -.005 -.005 -.005 .000 .005 .010 .015 .020 .025 .030 .000 .005 .010 .015 .020 .025 .030 .000 .005 .010 .015 .020 .025 .030 -.01 -.02 -.01 -.02 -.01 -.01 .00 .01 .02 .03 .04 .05 .00 .01 .02 .03 .00 .01 .02 .03 .04 .05 .00 .01 .02 .03 .04 1 1 1 1 1 1 1 cuuae epneo NorwegianAccumulatedResponse income of Accumulated ResponseSwedishincome of ulated incomeAccum ResponseGerman of Accumulated Response Frenchincome of Accumulated ResponseDanishincome of AccumulatedincomeResponse Italian of Accumulated Response British e incom of 2 2 2 2 2 2 2 to Struc tural One S.D. Innovations S.D. turalOne Struc to Innovations S.D. turalOne Struc to Innovations S.D. StructuralOne to Innovations S.D. StructuralOne to Innovations S.D. StructuralOne to Innovations S.D. StructuralOne to Innovations S.D. turalOne Struc to 3 3 3 3 3 3 3 4 4 4 4 4 4 4 Shock1 Shock1 Shock1 Shock1 Shock1 Shock1 Shock1 5 5 5 5 5 5 5 6 6 6 6 6 6 6 hc 2 Shock 2 Shock 2 Shock 2 Shock 2 Shock 2 Shock 2 Shock 7 7 7 7 7 7 7 8 8 8 8 8 8 8 9 9 9 9 9 9 9 10 10 10 10 10 10 10 -.0076 -.0072 -.0068 -.0064 -.0060 -.016 -.012 -.008 -.004 -.020 -.016 -.012 -.008 -.004 -.010 -.009 -.008 -.007 -.006 -.005 -.004 -.003 -.002 -.012 -.008 -.004 -.016 -.012 -.008 -.004 -.040 -.036 -.032 -.028 -.024 -.020 -.016 -.012 -.008 -.004 .000 .004 .000 .000 .004 .000 .004 1 1 1 1 1 1 1 AccumulatedResponse Norwegian of TB Accumulate dResponseSwedish TB of AccumulatedResponseGerman TB of AccumulatedResponseDanish of TB 2 cumulatedAc ResponsItalian of eTB 2 2 AccumulatedResponse British TB of 2 2 2 2 AccumulatedResponseFrench TB of Innovations turalS.D. One Struc to oSrcua n .. Innovations S.D. One Structural to Innovations S.D. One Structural to Innovations StructuralS.D. One to Innovations StructuralS.D. One to Innovations StructuralS.D. One to to Structural One S.D. Innovations S.D. One Structural to 3 3 3 3 3 3 3 4 4 4 4 4 4 4 Shock1 Shock1 Shock1 Shock1 Shock1 Shock1 Shock1 5 5 5 5 5 5 5 6 6 6 6 6 6 6 Shock2 Shock2 Shock2 Shock2 Shock2 Shock2 Shock2 7 7 7 7 7 7 7 8 8 8 8 8 8 8 9 9 9 9 9 9 9 10 10 10 10 10 10 10

173

CEU eTD Collection Norway, the trade balance decreases with the permanent shock, w shock, permanent the with decreases balance trade Norway,the the assumptions, identification the By Italy. of case in profound period of free float. s historical previous the In balance. trade the and income between

fet o praet hcs r mr dvre I cs o Denmar of case In diverse. more are shocks permanent of effects after transitory dieterm out effect the Thus, effects shock onthe of income. the and Great Britain. Inand Great se Britain. Sweden, followed is an the by the decrease increase in as icm ad h tae aac t mv i te ae ieto. Fi direction. same the in move to balance trade the and income cause external more to subject are economies open small out, points 590) incom in changes temporary explaining in harvests, failed as such temporar ofprevalence the the to out may point income changestemporary in t of correlation positive the Thus, 1981). (Sachs shock (supply) demand decreas to assumed is It change. the of source the on depending temporary a to balance trade the of response the First, ways. post-Bretton-Woods the and period Woods Bretton the also covers which 1870-1992, of exami (1998) Kim 1850-1913, of period the covers chapter this Whereas a or methodology the in difference slight a to due be may This cont is Britain Great of case in balance trade the and income pos the Furthermore, shock. transitory the to income of response the in ot of case in clear not is relationship The Norway. and Britain ca in correlation positive a is there study, this In (1991). Warne and V by 1871-1986 and (1998) Kim by 1869-1991 Sweden for observed was correlation n h tae aac, tastr sok eue te rd bal trade the reduces shock transitory a balance, trade the On The positive correlation between the income and trade balance is balance trade and income the between correlation positive The r countercyclical the on evidence of lack the is finding puzzling The 174

rary to the results of Kim (1998). (1998). Kim of results the to rary her countries due to fluctuations to due countries her change in income is different is income in change transitory shock has no long- no has shock transitory e (increase), if it is due to a to due is it if (increase), e hereas it increases in France in increases it hereas e. Second, as Kim (1998, Kim as Second, e. ifrne n ie spans. time in difference , emn, tl and Italy Germany, k, shocks, which tend to to tend which shocks, ance in all cases. The The cases. all in ance e f emr, Great Denmark, of se al, h correlation the nally, he trade balance and and balance trade he uis te positive the tudies, tv rltosi of relationship itive nes a longer period period longer a nes addressed in three in addressed y shocks, supply cond year. cond few years. few elationship elationship redin redin

CEU eTD Collection between the income and the trade balance is questioned by real real by questioned is balance trade the and income the between and in the following I eachand the integrated following in assume be of variable to 1. order are theall These variables. case of in levels at conventional significance ca it However, variables. the of any for levels significance cannot level in root unit a of hypothesis the test, Dickey-Fuller

5.4 The1957-2010 States, United 5.4 movements. shocks income determining to the in trade balance the is analysis above the from drawn be to conclusion only the case, income between correlation positive a induce also can taxes or i change as such shocks demand that suggests (1995) Baxter example, income. Shock 2 refers to a shock generating a income. shock Shock 2 refers transitory income. changes in to generating shock a to refers 1 Shock error. standard one to refers S.E. denot B income. denotes Y factorization. structural from decomposition obtained from from obtained 1957:1 for States United the for data quarterly the use I States. is determined by the availability of the quarterly data. determinedis the by availability the data. quarterly of e the of propensities investment and savings the reflects GDP trade the of representation The GDP. nominal to exports net nominal balanc trade The prices). 2005 at (GDP GDP real of log natural

In estimation, I use 4 lags for the United States. Tables 5.2 to to 5.2 Tables States. United the for lags 4 use I estimation, In For the comparison purposes, I estimate the equation (5.1) also for also (5.1) equation the estimate I purposes, comparison the For The variables are tested for the unit roots (not reported here). B here). reported (not roots unit the for tested are variables The International Financial Statistics Financial International 175

(CD ROM). Real income is measured as a a as measured is income Real ROM). (CD n be rejected in the first difference first the in rejected be n conomy. The period under study study under period The conomy. and the trade balance. In that that In balance. trade the and through 2010:1. The data are data The 2010:1. through e is measured as the ratio of of ratio the as measured is e business cycle research. For For research. cycle business e eetda conventional at rejected be importance of temporary temporary of importance n government spending spending government n ased on the augmented the on ased 5.3 show the variance the show 5.3 therefore transformed transformed therefore permanent changes in in changes permanent balance as a ratio to to ratio a as balance es the trade balance. balance. trade the es the for the United United the for the

CEU eTD Collection aac. ihn h 2ya hrzn tastr cags con for account changes transitory horizon, 2-year the Within balance. Notes: See Table 5.1. 5.1. Table See Notes:

to 2003, where only approximately 70% of income changes were permanent (Kim 1996,466). changes were 2003,wherepermanent to income 70% of approximately only estimated those than greater is transitory to relative income per of role The permanent. are changes income of 97% Approximately more than 82% of changes in the U.S. trade balance. more thetradechanges U.S. in than 82% of balance. changes transitory the whereas income, in variance the of 98% than permane period, two-year Within period. post-Bretton-Woods the for 2010 5.2: Variance factorization,Table Stat United from decomposition structural effect si wasdocumented (1999), statistically not however, also Hossain by this ac current US on income of component permanent of effect long-run The with accordance in is This balance. trade U.S. the in movements Years ahead Y-P TB-T TB-T Y-P ahead Years 20 97.144 (0.009) 84.407 (0.003) 84.407 (0.009) 97.144 20 8 97.144 (0.009) 84.407 (0.003) 84.407 (0.003) 84.408 (0.009) 97.144 (0.003) 84.427 (0.009) 97.144 (0.003) 84.427 (0.009) 97.143 (0.003) 84.464 (0.009) 97.143 8 (0.003) 84.916 (0.009) 97.158 7 (0.003) 85.805 (0.009) 97.163 6 (0.003) 93.034 (0.009) 97.404 5 (0.008) 97.628 4 3 2 1 Table 5.3 documents the variance decomposition of the U.S. current ac current U.S. the of decomposition variance the documents 5.3 Table h scn pr o te al sos h efc o cags n incom in changes of effect the shows table the of part second The 1957-2006. States United the of decomposition variance the shows 5.2 Table

176

by Kim for the period from 1957 from period the for Kim by the findings of Kim (1996). Kim of findings the in income account for for account income in more explain shocks nt more than 84% of of 84% than more manent changes in in changes manent count balance was balance count e on the trade trade the on e gnificant. gnificant. count balance count es, 1957 – CEU eTD Collection period, four impulses are presented. The left two panels show the show panels two left The presented. are impulses four period, balance. Notes: See Table 5.1. Table See Notes: 2010 5.3: Variance factorization,Table Stat United from decomposition structural response of income and trade balance to a transitory shock (shock 2). (shockaresponse transitory 2). shock and balance of trade to income pane two right The 1). (shock shock permanent a to (B) balance trade imp more are shocks transitory whereas changes, income determining the period of 1971-2010. bal trade the decreases income to shock transitory hand, other the On Years ahead Y-P TB-T TB-T Y-P ahead Years 20 98.177 (0.009) 82.579 (0.003) 82.579 (0.009) 98.177 20 8 98.177 (0.009) 82.578 (0.003) 82.578 (0.003) 82.584 (0.009) 98.177 (0.003) 82.586 (0.009) 98.177 (0.003) 82.574 (0.009) 98.180 (0.003) 82.666 (0.009) 98.217 (0.003) 82.677 8 (0.009) 98.285 (0.003) 82.951 7 (0.009) 98.327 (0.003) 98.341 6 (0.009) 98.246 5 (0.008) 99.782 4 3 2 1 Figures 5.2 to 5.3 show the plots of accumulated impulse responses. For responses. impulse accumulated of plots the show 5.3 to 5.2 Figures hs fnig spot h hptei ta praet hcs are shocks permanent that hypothesis the support findings These In the United States, income increases permanently due to a p a to due permanently increases income States, United the In

177

response of income (Y) and and (Y) income of response ance. This holds also for also holds This ance. ls show the accumulated the show ls ermanent income shock. shock. income ermanent ortant for the trade trade the for ortant oe motn in important more each country- each es, 1971– CEU eTD Collection emnn sok t icm la t a emnn ices i income in increase permanent a to lead income to shocks permanent II period. pre-W the in same the were balance trade the in fluctuations run tha suggest results These balance. trade the reduce to tend income

responses, States, United 1957-2010 Figure Accumulated 5.2: -.0030 -.0025 -.0020 -.0015 -.0010 -.0005 -.0035 -.004 .000 .004 .008 .012 .016 h fnig ae osset ih h fnig o te rvos secti previous the of findings the with consistent are findings The 2 2 Accumulated Response of TB to Shock1 to TB of Response Accumulated Accumulated Response of Y to Shock1 Y to of Response Accumulated 4 4 6 6 Accumulated Response to Structural One S.D. Innovat S.D. One Structural to Response Accumulated 8 8 10 10 12 12 14 14 16 16 18 18 20 20 178

-.0015 -.0010 -.0005 -.0035 -.0030 -.0025 -.0020 -.004 .000 .004 .008 .012 .016 2 2 Accumulated Response of TB to Shock2 to TB of Response Accumulated Accumulated Response of Y to Shock2 to Y of Response Accumulated 4 4 6 6 ar I and the post-World-War post-World-War the and I ar 8 8 t the sources of the short- the of sources the t 10 10 , transitory shocks to to shocks transitory , ions 12 12 14 14 on. Whereas Whereas on. 16 16 18 18 20 20

CEU eTD Collection Conclusion 5.5 (2000) and Veselkova and Horvath (2000)and (2008). and Veselkova line with the findings of Hoffman (2001), Kano (2003), Kim (1996, 1998), Milj 1998), (1996, Kim (2003), Kano (2001), Hoffman of findings the with line of model intertemporal (1981) Sachs’ the with consistent are findings t in changes determining those from different are balance trade responses, States, United 1971-2010 Figure Accumulated 5.3: -.003 -.002 -.001 -.004 .000 .000 .004 .008 .012

The main findings of this chapter suggest that factors determini factors that suggest chapter this of findings main The 2 2 Accumulated Response of TB to Shock1 to TB of Response Accumulated Accumulated Response of Y to Shock1 to Y of Response Accumulated 4 4 6 6 Accumulated Response to Structural One S.D. Innovat S.D. One Structural to Response Accumulated 8 8 10 10 12 12 14 14 16 16 18 18 20 20 179

-.004 -.001 -.003 -.002 .000 .004 .008 .012 .000 2 2 Accumulated Response of TB to Shock2 to TB of Response Accumulated Accumulated Response of Y to Shock2 to Y of Response Accumulated 4 4 6 6 he long-run income. These These income. long-run he 8 8 trade balance and are in in are and balance trade 10 10 ng the changes in the the in changes the ng ions 12 12 14 14 16 16 kovic 18 18 et al.et 20 20

CEU eTD Collection permanent shock to income in all the countries. This is hardly sur hardly is This countries. the all in income to shock permanent pressures. The fiscal shocks were related mostly to an incre an to mostly related were shocks fiscal The pressures. dema to shocks the are century nineteenth the in shocks demand potential oiie orlto my e u t te ifrne i tm spa time in differences the to due be may correlation positive Great Denmark, of case in balance trade and income the between hs nld tcnlgcl mrvmns n h pouto o io, improve iron, of production communication. transportation, manufacturing or the in improvements technological include thus positi the of Examples revolution. industrial the with coincided study r in grew income The income. to shocks permanents the with associated the A of military shoc typical example the supply temporary conflicts. leading contraction, monetary a as worked gold on countries of number the hand, other the On expansion. monetary as worked ores low-grade from gold proce cyanide the of invention the or discoveries gold Significant gold. temporary or shocks demand the as identified are these framework, changes aggregate the that the view In the support income. chapter this to of shocks results The transitory the with associated determinants, although the focus is on the medium-run factors. determinants, factors. the although focus onthe medium-run is va diff on focus I 6, Chapter to in shocks, income transitory allowof sources various not does approach this As balance. trade the and income positi a induce also can shocks demand the that argues (1995) Baxter de over shocks supply temporary the of importance relative the correlat positive the model, intertemporal traditional the methodology. Within sl or period) post-Bretton-Woods the to reaching spans time longer eod te eut o ti catr ugs ta te hne i te i the in changes the that suggest chapter this of results the Second, In contrast to most of the previous studies, the results suggest the suggest results the studies, previous the of most to contrast In 180

ased government spending during during spending government ased ns (gold standard period vs. vs. period standard (gold ns mand shocks. Alternatively, Alternatively, shocks. mand prising as the period under under period the as prising demand/aggregate supply supply demand/aggregate Britain and Norway. The The Norway. and Britain in the trade balance are are balance trade the in k is a failed harvest. a failed harvest. k is gt ifrne i the in differences ight ve correlation between correlation ve ve supply side shocks shocks side supply ve supply shocks. The The shocks. supply rious current account account current rious positive correlation positive ss for extraction of of extraction for ss rnit between erentiate nd and supply of supply and nd ion points out to out points ion sos t the to esponse o deflationary to an increase in in increase an ncome are are ncome ments in in ments CEU eTD Collection biggest creditors of the period, ran the surplus of 3.3 and 1.3 percent r percent 1.3 and 3.3 of surplus the ran period, the of creditors biggest which United happen States. be the to in liquid most the and deepest world’s the to channeled then are savings the in glut savings the by driven is deficit accountcurrent U.S. de budget large the of result the is deficit account current U.S. f The hypothesis. glut savings the and hypothesis deficit twin the surp account current large These I. War World the to running years 14 se the Germany, and France GDP. of percent 8.6 of value astonishing I, War World the of eve the At GDP. of percent 4.5 of surplus account r Britain globalization, of era first the as known period a 1913, and Introduction 6.1 countries in East Asia and oil-exporters. The phenomenon was termed the glocountries The was oil-exporters. East Asia in phenomenon termed and the financed was deficit this Surprisingly, terms. absolute in USD G of percent 6 of low its reached deficit account current U.S. the 2006, defic account current the running started power, military major lar world’s the States, United the hand, other the On 39). 2009, (Wolf a current running stopped whole a as world developing the 1999 In economy. the Application of Formal Methods to History. Secti History. to Methods Formal of Application the 95 A revised version of this chapter is forthcoming i forthcoming is chapter this of version revised A The global imbalances took place also in the past globaliz past the in also place took imbalances global The The current debate surrounding the global imbalances typicall imbalances global the surrounding debate current The h ps dcd ws akd y h pzln dvlpet n t in development puzzling the by marked was decade past The CHAPTERGLOBAL– 6 IMBALANCESFROM THE HISTORICAL

PERSPECTIVE on 'Cliometrics' on n 181 Historical Social Research. An International Journa International An Research. Social Historical

95 . .

rest of the world. These excess excess Theseworld. the of rest it of an unprecedented size. In size. unprecedented an of it ficit; the latter argues that the the that argues latter the ficit; ation process. Between 1870 Between process. ation ormer asserts that the large the that asserts ormer mostly by the developing developing the by mostly y contrasts two views: two contrasts y luses were matched by by matched were luses this surplus reached anreached surplus this n n vrg current average an an espectively during the during espectively gest economy and the the and economy gest DP or 803.5 billion 803.5 or DP od n te third the and cond financial markets, markets, financial bal imbalances. bal imbalances. e international he ccount deficits deficits ccount l for l CEU eTD Collection balance is significant only when bond markets are incorporated. Th incorporated. are markets bond when only significant is balance period. Countries with more developed financial markets tend to r to tend markets financial developed more with Countries period. hypothesis glut savings global The 5). Chapter (see balance former holds better for developing countries. In developed countries developed In countries. developing for better holds former ar hypothesis glut savings global the and hypothesis deficits short-run, suggesting the importance of the short-run fluctuations in in fluctuations short-run the of importance the suggesting short-run, balan budget government the period, pre-War wit Inthe capitalization. interaction its by mitigated is balance account current the (or lower current account surpluses). However, the significance of significance the However, surpluses). account current lower (or than 7 percent(all of data GDP between 1870and Taylor come 1913 2002). from current ran Australia and Canada example, For Europe. Eastern or Ne the in countries the of deficits account current persistent the 2008). (Schul quality institutional or 2006), Schularick and (Ferguson investors the reduced significantly that status colonial the 2004), Williamson populations urban young, educated, and migrants, resources, natural 1994), dependency the as such flows, capital the of determinants main and 107 countries (21 developed and 86 developing) for the period of 1970 through and andfor 107countries of 86developing) 1970 the 2007. (21 period developed the for countries 14 of compriseddataset the upon analysisrelies savings global and deficits twin the test to is chapter the a main The 1996). Faruqee and Debelle and 2007a; Ito and Chinn 2007, Chinn and Ito works empirical previous the on drawing directly, account current Previous studies of the pre-World War I creditors and debtors focus debtors and creditors I War pre-World the of studies Previous hs hpe tks dfeet prah n eaie te mai the examines and approach different a takes chapter This o niiae h fnig, fn te olwn. h rsls sugges results The following. the find I findings, the anticipate To 182

holds for the post-Bretton-Woods post-Bretton-Woods the for holds lt yohss Te empirical The hypothesis. glut nt uuly xlsv. The exclusive. mutually not e w World but also in Northern Northern in also but World w ratio (Williamson and Taylor Taylor and (Williamson ratio period of 1865 through19131865 of period te ulc od market bond public the h ce is significant only in the in only significant is ce un current account deficits deficits account current un (Chinn and Prasad 2003; 2003; Prasad and (Chinn the capital openness was openness capital the ere, its positive effect on effect positive its ere, default risk perceived by by perceived risk default account deficits of more of deficits account , the government budget budget government the , n determinants of the the of determinants n the current account account current the rc ad Steger and arick ed mostly on the the on mostly ed t that the twin twin the that t (Clemens and and (Clemens im of im CEU eTD Collection by the proponents of the global savings glutglobalby hypothesis. of the savings the proponents iaca mres u tmoaiy a got cniin ad 3 c (3) and conditions growth bad temporarily but markets financial (2) conditions, growth good and markets financial deep with countries i that illustrates model formal Their (2006). al. et Caballero real from assets financial generate to countries of ability marke financial developed more with countries the to transferred accumul The rate. savings higher to lead therefore and opportunities ma developed financially less savings: and development financial sa in reduction the to lead and effect opposite the have may it rela a as understood is deepening financial the if that notes he hand, more induce could deepening financial the that suggests (1995) Edwards Theoretical issues 6.2 I World-War period. w This balance. account current the higher the assets, foreign net Fina availability. data the by limited is hypothesis the of how There, period. pre-War the for hold conclusions Similar confirmed. not Financial Development openness the onecapital onthe development other. financial hand and and the b latter the balance, budget the and balance account current the The hypothesis. glut savings global the and hypothesis deficits h efc o te iaca deeig n h cret con ba account current the on deepening financial the of effect The h goa svns lt yohss rdcs h ngtv rela negative the predicts hypothesis glut savings global The hr ae w mjr optn epaain o te lbl imba global the of explanations competing major two are There

183

lly, the higher the initial level of the of level initial the higher the lly, investments was emphasized by by emphasized was investments vings. The latter is emphasized emphasized is latter The vings. former draws the link between between link the draws former n the world comprised of (1) (1) of comprised world the n etween the current account on on account current the etween as true especially in the pre- the in especially true as rkets offer little investment little offer rkets xed borrowing constraint, constraint, borrowing xed ts (Bernanke 2005). The The 2005). (Bernanke ts ated savings are then then are savings ated tionship between the the between tionship countries with deep deep with countries lance is ambiguous. ambiguous. is lance saving. On the other other the On saving. acs te twin the lances: ever, the testing testing the ever, ountries with with ountries CEU eTD Collection plus transferable deposits and electronic currency (M1), plus plus (M1), currency electronic and deposits transferable plus the in deposits and currency includes measure This 1970-2007. of period using the pre-war data. data. thepre-war using whereas in 1913 this had reached 64 percent of the total (Michie 1999 ,71). (Michie total hadwhereas 1999,71). reached 1913this in 64 percent of the classifie be could assets financial of percent 56 estimated an in role important an played These development. market bond and stock financ the of aspects specific more capture not does it economy, t of picture the gives p proxy the this as Although used development. is financial (M2GDP) GDP of share a as M2 1865-1913, of period the currentaccountgenerate the first and deficit. the the conditions, growth exceptional but markets financial underdeveloped depos of certificates deposits, transferable currency foreign (the GDP of % as M3 as development financial the proxy I (1993), i Therefore, services. transaction provide to systems financial rel more are M2 and M1 Rather, borrowers. to savers from funds channel of ability the capture not do they because development financial Blanchard dom of equities illiquid and bonds foreign liquid between choice a faced peri pre-War the in that argues1989) 453; (1987, Temin globalization. 96 demand for assets. U.S. foreign for demand U.S. in increase exogenous from result a thus is c U.S. The assets. foreign and U.S. between also but goods foreign and notntl, h ipret usiuaiiy f f of substitutability imperfect the Unfortunately, The financial development proxies were based on M1 or M2 monet M2 or M1 on werebased proxies development financial The De Gregorio and Guidotti (1995) argue that M1 and M2 may be a poor poor a be may M2 and M1 that argue (1995) Guidotti and Gregorio De The imperfect substitutability of financial instruments wa instruments financial of substitutability imperfect The t al.et 20) ru ta tee s mefc sbtttblt nt onl not substitutability imperfect is there that argue (2005) 96

nnil ntuet i dfiut o et o a bro a for test to difficult is instruments inancial 184

d as domestic or foreign debt, debt, foreign or domestic as d t ad euiis repurchase securities and it, ln wt Kn ad Levine and King with line n s stressed for both periods of periods both for stressed s ial development, such as the the as such development, ial time and savings deposits, deposits, savings and time financial intermediaries to to intermediaries financial liquid liabilities) for the for liabilities) liquid e oeiain f the of monetization he od the British investors British the od od ad n foreign in and goods Great Britain: in 1850 in Britain: Great estic firms. Similarly, Similarly, firms. estic urrent account deficit account urrent ated to the ability of of ability the to ated central bank (M0), (M0), bank central capital will flow to to flow will capital ary aggregates. For For aggregates. ary y between U.S. U.S. between y roxy of the the of roxy proxy of of proxy d sample ad CEU eTD Collection 2007, 7). ra a as measured both capitalization, market stock and creation S use I market, financial the of size overall the of effect the proxy third the percenta a as Therefore, capitalization market stock the is development markets. stock in e.g. system, non-bank develop financial the capture not does and system banking the through t for data the of rest The WDI. from comes data M3/GDP (PBBM). publ the of share effect the for also a control I Finally, (OVERHEAD). as costs overhead bank’s and (MARGIN) margin interest two on rely I market, financial the of efficiency the capture financial the of proxies as GDP to ratio a as (SMTO) turnover r a as traded (SMTV) value total market stock the use I (2007), market the of activeness the for also control I 2001), al. et (Beck may be understood as a relaxed borrowing constraint. borrowingmaya constraint. understood relaxed as be cre the in increase an Thus, sector. private the to funds channeling in that is ratio t captures monetization therefore and sector public the the to credit excludes over advantage major The of 2007). ratio Chinn the and Ito is 1993, development financial the of proxy second The and Gregorio De (see GDP to sector private the to (CREDIT) au o 08. iial, rts mntzto rati monetization st the of dominance the reflecting probably German, British Similarly, 0.84. of value an 1970 between M3GDP U.S. average the exceptional: or market byand funds shares funds mutual held residents. of time currency foreign checks, travelers plus (M2), agreements 97 It must be noted that if measured as the monetizat the as measured if that noted be must It As the size of the financial market may be less relevant if relevant less be may market financial the of size the As The problem of this proxy is that it captures only the financial developm financial the The captures only it that problemproxy ofis this

ock market over the banking financial development. development. financial thebanking marketover ock ion, the U.S. financial development is above averag above is development financial U.S. the ion, i rltvl salr oprd ie t Scandinav to i.e. compared, smaller relatively is o 185 d 2007 is 0.71. This value is close to the mean plu mean the to close is value This is0.71. 2007 d

he role of financial intermediaries intermediaries financial of role he banking sector indicators: the net the indicators: sector banking ge of GDP (STOCK). To capture To (STOCK). GDP of ge 97 Guidotti 1995, King and Levine Levine and King 1995, Guidotti IZE, the sum of private credit private of sum the IZE,

atio to GDP and stock market market stock and GDP to atio ic bond market capitalization market bond ic there is little market activity activity market little is there market activity. Second, to to Second, activity. market eois cmeca paper, commercial deposits, i t GP Cin n Ito and (Chinn GDP to tio . Following Ito and Chinn Chinn and Ito Following . he period of 1970 through 1970 of period he dit to the private sector sector private the to dit ment that occurs in the the in occurs that ment f hi ttl assets total their of of the financial financial the of domestic credit credit domestic ent that occurs occurs that ent e but not but e

s 1 s.d. s.d. 1 s a or ian it CEU eTD Collection proxy of the capital openness is KAOPEN index (Chinn-Ito KAOPEN is proxy index openness 2007b). the capital of oes f h cret con sget ht h gvrmn bde deficits budget government the that suggest account current the of models balanc budget the and account current the of correlation positive the to availability. data the is reason development financial the between interaction the also examine ma financial developed with countries other and States United the allowe economies Asian East in liberalization account capital cap cross-border of direction the affect can markets financial would This capita. per GDP the and inflows capital (20 Steger and Schularick or (2008) Esteves F (2004), problems. two pose would Second (1999) Stone missing. by are gathered force labor educated or quality o attract still may openness capital of degree high opennessCapital (1975), andTilly Bureau (1963). Urquhart Census (1973), of United the States Mitchell (2004), Klovland (2004), Grytten (2004), Gregory (1967), Mattia de (2005), (2001) al. et Bordo (1961), Butlin from come period pre-War the for data datab (2000) al. et Beck of update 2009 December the from comes 2007 98 Londontheirfinancial funds through other 2008,1). centers, (Esteves especially l the capital, their invested banks or citizens their way the w countries, in Even mobility. capital free with associated clas the because results the on effect significant a have would Budget balance Alliance. Thus, Stone’s data would underestimate th underestimate would data Stone’s Thus, Alliance. large enjoyed debtor, European largest the Russia, flows, capital German and French cover not do data equal in difficulty theoretical a is there However, A possible solution would be to replace KAOPEN ind KAOPEN replace to be would solution possible A In contrast to the global savings glut stands the twin deficits twin the stands glut savings global the to contrast In c pre-war the of analysis the in included not is variable The n h goa iblne dbt, enne 20) ugss t suggests (2005) Bernanke debate, imbalances global the In

98 oee, d nt xet ht xlso o ti variable this of exclusion that expect not do I However, ing capital inflows with capital openness. An econo An openness. capital with inflows capital ing nly small capital inflows, if other factors, such a such factors, other if inflows, capital small nly e capital inflows to European regions. regions. European to inflows capital e 08), it is reasonable to expect a high correlation correlation high a expect to reasonable is it 08), aia ifos rm rne hns o h Franco-Ru the to thanks France from inflows capital plague the regression with multicollinearity. Secon multicollinearity. with regression the plague 186 which played an important role in Europe. For examp For Europe. in role important an played which te ot iey sd aa n rts cptl expo capital British on data used widely most the , rt bsd n h suis y lmn ad Williamso and Clemens by studies the on based irst, ex by the net foreign capital flows as a share of G of share a as flows capital foreign net the by ex

atter had the choice of channeling channeling of choice the had atter here governments tried to control control to tried governments here d the excessive savings flow to to flow savings excessive the d and the capital openness. The The openness. capital the and tl lw. o eape the example, For flows. ital sical gold standard era was was era standard gold sical urrent account. The main main The account. urrent rkets. It is of interest to to interest of is It rkets. argument that points out points that argument hat the openness of the the of openness the hat e. The intertemporal intertemporal The e. , Capie and Webber and Capie , ase. The historical The ase. nue current induce

s institutional institutional s between the the between my with a a with my (2008), d, these these d, ssian ssian DP. DP. rts rts le, le, n CEU eTD Collection pulled in foreign investment. Therefore, it is appropriate to view to appropriate is it Therefore, investment. foreign in pulled saving depressed domestic and (Argentina, Canada) Australia New countries World population reduces national savings, and hence the current account bala current account the hence andsavings, reducesnational population savings national in decrease the in result might deficit budget positive. The budgetpositive. fiscalgovernment measuredbalance as is balanc body of literature that points out to other to out determinants ba body of the current account of that points literature t World Old the in savers old from transfer intergenerational an Williamson and Taylor (1994) argue that in the pre-War period high dependency high period and the Taylor argue in pre-War that (1994) Williamson they when case in only matter profiles demographic the However, economicall of share higher a theory, cycle life the to According taxpayer the as savings private the in increase an by coupled i 1974), (Barro equivalence Ricardian absent of case In 1998). Rogoff present to future from income redistributing by deficits account grgt demand).aggregate of GDP. The data come from Mitchell (2008), Bordo (2008), Mitchell from come data The GDP. of expenditur government the and balance revenue government the between difference budget the period, pre-War the For fr database. come Indicators data The GDP. of percentage a as surplus/deficit cash 99 (1997). (1997). Dependency ratio medium-run. For the review of the literature on the Ricardian theRicardian on literature the of thereview For Widely discussed are demographic factors, especially the one chi one the especially factors, demographic are discussed Widely o te eid f 9020, h bde blne GVA) a maue a measured was (GOVBAL) balance budget the 1970-2007, of period the For In addition to the twin deficits and the global savings glutglobal deficits the twin In to and hypotheses,addition i the there savings

99 h epce sg o te oenet ugt siae s therefore is estimate budget government the of sign expected The

effects, see Bernheim (1987) and Briotti (2005). (2005). Briotti and Bernheim(1987) see effects, 187

et al.et (2001), and Obstfeld and Jones and Obstfeld and (2001), s save for the future tax rise; the rise; tax future the for save s (or a Keynesian increase in in increase Keynesian a (or the large capital inflows as inflows capital large the o young savers in the New the in savers young o y dependent persons in the in persons dependent y eeain (bted and (Obstfeld generations m ol Development World om e shareGDP. as a of ifr cos countries. across differ was measured as the the as measured was nce (see Mason 1988). Mason(see nce .e. the budget deficit budget the .e. ld policy of China. China. of policy ld e as a percentage percentage a as e lance the over rates in three three in rates s rates and and rates s s as large the s

CEU eTD Collection youth higherUnited decreased States natural U.S. despite incr dependency the same the of immigration the whereas UK, the in dependency youth the g age 20-40 the in those of emigration the that note fn) 228, (1976, Urquhart from ratios dependency youth similar roughly had States United the b could reason The States. United the sample, their in country fourth However, rate. savings aggregate the in fall one-percentage-point r dependency the in rise one-percentage-point a Typically, World. (between 15 and 64). The data come from WDI database. For the the For database. WDI from come data The 64). and 15 (between a working to 65) above and 15 (below population age old and young of share depende age the where GDP, of percentage a as (YTHDEP) ratio differe the (OLDE old (DEPR), capture total use I To countries, of profiles run. demographic short the in negative be should and ambiguous gr economic the between relationship the that argue (1991) Summers and across aggregation of result a as savings private higher to lead marriage market. marriage market. make to save sons with families as motives, bequest the via China furthe imbalance this that suggest (2009) Shang and Wei Caucasus. the and count Asian East other in also found be can ratios sex Distorted 2010). ( 2000s early the of generation the for 100 to 124 to escalated and 1980s the for girls 100 to boys 108 was sexes the between imbalance the in rates male-female natural the in distortion a to leads preference Furthermore, rates. dependency the decreased child one The story of dependency ratios of the past decade is well-known. Chine well-known. is decade past the of ratios dependency of story The Modigliani (1970) also suggests that in a life-cycle setting, highe setting, life-cycle a in that suggests also (1970) Modigliani 188

ouain I Cia ln, the alone, China In population. households. However, Carroll Carroll However, households. generation born in the late the in born generation their son competitive in the the in competitive son their ncy ratio is defined as the as defined is ratio ncy ate led approximately to a to approximately led ate P) and youth dependency youth and P) pre-war period, I use the the use I period, pre-war this did not hold for the the for hold not did this 1880 to 1910. Green and Green 1910. to 1880 e that Great Britain and Britain Great that e of sons over daughters daughters over sons of ries or western Balkans western or ries r income growth will growth income r Economist, 4 March March 4 Economist, owth and savings is is savings and owth g gop o the to group age r raises savings in in savings raises r ease rates. ease rates. roup increased roup ge population population ge se policy of of policy se cs n the in nces CEU eTD Collection per capita income of the high-income OECD countries in the post- the in countries OECD high-income the of income capita per period of 1970-2007, the data come from the WDI database. For the pre-W the For database. WDI the from come data the 1970-2007, of period external liabilities. Lassudrie-Duchêne liabilities. external imp balance account current its country matures, the As deficit. savings and increase their consumption, which results in the trade in defi whichsavings balance consumption, results their and increase economi mature of profitability the rises, countries developing Lassudrie-Duchêne (see investment higher requires development of stage intermediate country a that suggests hypothesis development economic of stage f aig no con Lassudrie-Duchêne account into taking if acc current run to assumed are development economic of stage lower acc current the with relationship positive a have to expected is r or (RELYINCOME) period pre-War the in Germany and France real average the to (relative income capita per real the (2004). comeWilliamson from and Clemens their against borrowing are and countries developed the than faster develop less the as account, current the with relationship expected negative is (ECONGROWTH) growth economic real Second, ambiguous. Economic growth (2004) and Clemens Thefraction Williamson data from comes of population. the total a children the of proportion the as measured ratio dependency youth Two proxies are used to capture the stage of economic development economic of stage the capture to used are proxies Two Economic growth is another factor often cited as the current account current the as cited often factor another is growth Economic

t alet . 1990). Therefore, it imports capital and runs the current account account current the runs and capital imports it Therefore, 1990). . et al. et t al.et (1990) point out that as the competition from the from competition the as that out point (1990) 189 19) te xettos bu te in are sign the about expectations the (1990),

per capita income of Great Britain, Britain, Great of income capita per roves and it is able to repay its repayits to able is it and roves ount, as the countries at the the at countries the as ount, BW period (RELYOECD)) period BW es falls. They lower their their lower They falls. es elative to the average real average the to elative ed countries tend to grow to tend countries ed moving from a low to an an to low a from moving ount deficits. However, However, deficits. ount uue noe Fr the For income. future ideegr 93 or 1993 Kindleberger ged 14 or below as a a as below or 14 ged ar period, the data the period, ar hypothesis. First, First, hypothesis. determinant. The determinant. cit. cit. o ae the have to . . CEU eTD Collection between the NFA and the CA is negative. The positive relat positive The negative. is CA solvent. the and NFA the remaining between while deficit trade higher a sustain can NFA Netassets foreign Institutional quality countries drawn due data to availability. downsix to Here (1985). Goldsmith from come data the period, pre-War the For (2007). Lane of version updated an from come data The average. five-year the asse foreign net as measured is NFA The 14). 2005, (Eichengreen trade despi surplus, account current substantial a produce to sufficient divi and interest insurance, shipping, from income net The Britain. t was This flows. income foreign higher enjoy that NFA higher situation. economic invest. to incentive the on impact negative the example, For protected. are activities these from returns Countri CA. the and NFA the between relationships hypothetical two as serves NFA of stock the (NFA), assets foreign net of stock 100 (2008) for period. the prewar Sc by made was conclusion Similar 1970-2000. during flows capital the quality is institutional the that document (2005) al. etAlfaro financial open and system legal fina developed highly open with and countries system legal the on conditional is savings on development Goetzmann and Ukhov (2006) document that British i British that document (2006) Ukhov and Goetzmann As the current account is the sum of the trade balance and the ret the and balance trade the of sum the is account current the As Institutional quality affects the incentives to save and invest, as invest, andsave to incentives the affects qualityInstitutional Chinn and Ito (2005) find that in the developed countries, the effect of the of effect the countries, developed the in that find (2005) Ito and Chinn

100 190 Decisions by foreign residents are affected too. affected are residents foreign by Decisions nvestors had access to information about political political about information to access had nvestors

high risk of expropriation has a has expropriation of risk high ionship exists for countries with countries for exists ionship an initial condition. There are There condition. initial an major factor that attracted the attractedthe that factor major he case of the prewar Great Great prewar the of case he te a deficit on merchandise merchandise on deficit a te countries undertake less less undertake countries it defines how well the well how defines it ed wr mr than more were dends es with a higher initial initial higher a with es Here, the relationship relationship the Here, ts in the initial year of yearof initial the in ts hularick and Steger Steger and hularick and Milesi-Ferretti Milesi-Ferretti and urn on a country’s country’s a on urn , the sample is sample the , ca markets: ncial financial financial and and CEU eTD Collection political participation. The range is (-10, 10). The higher the the higher The 10). (-10, is range The participation. political cr o te OIY V Project. IV POLITY the of score Terms of volatility trade to andof exports imports GDP (TRADEGDP). meas I period. prewar the in important particularly was This better a signal also may It investment. foreign to attractive fact the with correlated be could openness Trade deficit. account an barriers th of trade some low by between emphasized was link openness the trade suggested of who importance The 1980s, the since terms the of deviation standard the as volatility trade of terms f income volatile more of face the in consumption their smooth to try greater highercorrelation: developmentfinancial leads to savings. countrie market emerging and countries developed less For savings. ult, uh s xsig osrit o te xrie f oe by power of exercise the on competi and recruitment executive of openness and competitiveness constraints existing as such quality, 101 Trade openness the country period. the in prewar capt to assumed is (SPREAD) spread bond Finally, expropriation. be can it as separately, effect its for test to interest va POLITY2 the in included is score The executive. the on constraints Pr IV POLITY the of score XCONST is proxy second The quality. For a more detailed information, see Marshall and and Marshall see information, more detailed a For Higher terms of trade of volatility might induce precautionary s precautionary induce might volatility of trade of terms Higher Three proxies are used to capture institutional quality. The pr The quality. institutional capture to used are proxies Three

101 h soe elcs aiu apcs f h institutional the of aspects various reflects score The Jaggers (2009). (2009). Jaggers 191

nesod s poy f h rs of risk the of proxy a as understood ure the trade openness as the sum sum the as openness trade the ure ability to service external debt. debt. external service to ability score, the higher the institutional institutional the higher the score, of trade over the corresponding the over trade of ure the creditworthiness of of creditworthiness the ure ors that make the country country the make that ors tiveness and regulation of of regulation and tiveness imary proxy is POLITY2 is proxy imary s they find the reverse reverse the find they s jc, .. h existing the i.e. oject, avings as consumers consumers as avings os I esr the measure I lows. te .. current U.S. the d ibe u i i of is it but riable e U.S. politicians politicians U.S. e the executive, executive, the CEU eTD Collection perspective, being an oil exporter may lead to an increas an to lead may exporter oil an being perspective, ofthe acc The current medium-term determinants 6.3 1 forwhich and takes oil-exporting 0otherwise. of countries the value of effect the for control In to order shocks. price oil of episodes sample produced almost 62 percent of the world GDP (Maddison 2001).(Maddison GDP world the of percent 62 almost produced sample countr the 1913 in Nevertheless, availability. data the by constrained countries of number The (USA). States United the and (UK), Kingdom (SPA Spain (RUS), Russia (NOR), Norway (JPN), Japan (ITA), (FRA France (DEN), Denmark (CAN), Canada (AUS), Australia Ar are: sample the in included countries The 1865-1913. of period the covers year of comprised is set data The period. I War pre-World the fet n noe i wl la t te euto i te urn acc current the in expec reduction is shock the oil to the if lead that will suggests (1981) it Sachs income, Finally, on effect below. moredetail in discussed issuesare These pose panels Such panels. short called are n>T with 103 Union. Soviet Oil WDI For the datafrom of database. 1970-2008, come the period come data the period, pre-War the For (TOTSD). period five-year 102 check to order In used. is average 4-year a 1910-1913, period last the list of variables and the data sources, see Appendix B.1. of variableslist and see sources, the data Appendix It is important to note that the 5-year averages p averages 5-year the that note to important is It as overestimated, be may proportion the that Note

This part examines the medium-term determinants of the current the of determinants medium-term the examines part This To capture the medium-term effects, 5-year non-overlapping ave non-overlapping 5-year effects, medium-term the capture To

anel consists of 14 countries and 10 time periods. periods. time 10 and countries 14 of consists anel different requirements on certain aspects of the es the of aspects certain on requirements different 192 the data for Russia include all the countries of th of countries the all include Russia for data the

e in the current account balance in in balance account current the in e ount balance, 1865-1913 ountbalance, oil, I include the OIL dummy, dummy, OIL the I include oil, ly data for 14 countries and and countries 14 for data ly , wdn SE, United (SWE), Sweden ), from Williamson (2008). Williamson from , emn (E) Italy (GER), Germany ), ount balance. From this this From balance. ount e t hv a transitory a have to ted rages are used.are rages the robustness of the the of robustness the 102 ies included in the the in included ies account balance in in balance account n h sml was sample the in For the complete the For gentina (ARG), (ARG), gentina The panels panels The timation. timation. e former former e 103 For CEU eTD Collection by Argentina in the years running up to the Baring Crisis of 1890. of Crisis Baring the to up running years the in Argentina by ewe te cnmc rwh n te ult o isiuin. more A institutions. of quality the and growth economic the between (2007) argues that “values of VIF of 10, 20, 40 or or (…).” analyses regression 40 20, 10, of VIF of “values that argues (2007) yearlyas r section are averages, usedwell section (see data onthe as determinants short-term and long-term the capture to and results no longer p-value significant (the was 14.6%). institutional of effect the However, below). (see model PCSE or size the or magnitude the in change significant no was There 1.701. (TRAD 2.446 to VIFdecreasedlargest theThis terms. interaction account current the re-estimated I results, the of robustness 104 line with the seminal work of Acemoglu Acemoglu of work seminal the with line s is capita per income relative and POLITY2 of correlation The currentaccount 8.6 Britapercent reached of GDP was of surplus Greatby of percent 30 than more of value the reached deficit account current current highest The B.2). Appendix in statistics descriptive (see 1. is VIFs the all of mean the and 30) of value threshold conservative greater is VIF largest the if multicollinearity of evidence Appendix (see (VIF) factor inflation variance the calculate pe 70 than more is which TRADEGDP, and M2GDP between correlation 104 However, some argue that the rules of thumb for VI for thumb of rules the that argue some However, h lret I (OIY) s 089 n te en I i 343 T c To 3.493. is VIF mean the and 10.899 is (POLITY2) VIF largest The

Most of the correlations of explanatory variables are below 0.50 ( 0.50 below are variables explanatory of correlations the of Most per 8.6 to GDP of percent –30 from ranged deficit account current The

et al.et even higher do not, by themselves, discount the res the discount themselves, by not, do higher even 193 (2001) who document the positive relationship positive the document who (2001) F should be taken with caution. For example, O’Brie example, For caution. with taken be should F

than 10 (some choose the more more the choose (some 10 than B.4). As a rule of thumb, there is is there thumb, of rule a As B.4). regressions without insignificant without regressions quality in the FE model was was model FE the in quality of the current account, cross- account, current the of account deficit was reached reached was deficit account EGDP) and the mean VIF to VIFto mean the EGDP) and lightly over 50%. This is in is This 50%. over lightly obustness of the results). ofobustness the results). In 1989, the Argentinean Argentinean the 1989, In of the coefficients in FE FE in coefficients the of considerably larger than than larger considerably D. h maximum The GDP. in in 1913. in in see Appendix B.3). Appendix see rulsm i the is troublesome rcent. Therefore, I Therefore, rcent. cent of GDP GDP of cent ek the heck ults of of ults n CEU eTD Collection

KOE) X(KAOPEN). (IQ) quality institutional (FD), development financial the include variables. dependent the as GDP) of percentage a (as investment estim is model the investment, and saving the between difference model6.3.1 General squares (OLS), fixed effects and random effects are estimate are effects random and effects fixed (OLS), squares y (2007, 10), expressed which the form: following in may be model various the estimate I behavior, account the current the of explanations test To (2008). Lee and (2007a) Ito and Chinn (2007), Chinn and Ito (2003), al. et Calderon (1996), Faruqee and Debelle of studies empirical foll approach empirical The 1865-1913. of period the during deficit account ν vector The assets). foreign net initial the and volatility openness trade ratio, dependency youth balance, government Germany, average the of income capita per real the to relative income the for deficit) a indicate values (negative a balance expressed current account the is where the variable dependent + β 105 i,t i,t i,t i,t For an overview of the econometric analysis of the of analysis econometric the of anoverview For is the composite error.is = α i i + β To estimate the model, several techniques are considered. First, p First, considered. are techniques several model, the estimate To det main the identify to is analysis empirical the of aim The 5 5 (IQ 1 FD i,t i,t * KAOPEN i,t + β s h vco o cnrl aibe (el cnmc rwh real growth, economic (real variables control of vector the is 1 IQ i,t + β i,t ) + λX 2

KAOPEN it it + ν i,t + β i,t i,t i -th unit at time time at unit -th (6.1) (6.1) panel data, see Wooldridge (2002), chapters 13-14. (2002), Wooldridge see data, panel 194 3 (FD

i,t * IQ * β and λ is a vector of coefficients and coefficients of vector a is λ and β i,t ) + β t . As the current account equals the the equals account current the As . d. income of the UK, France and France UK, the of income 105 4 4 (FD Each of the specifications isspecifications the of Each ated also with savings and savings with also ated proposed by Ito and Chinn Chinn and Ito by proposed The independent variables variables independent The 20) hn ad Prasad and Chinn (2002), i,t and the capital openness openness capital the and *KAOPEN s a percentage GDP as of riat o current of erminants , the terms of trade trade of terms the , ooled ordinary least least ordinary ooled ows the previous the ows i,t ) per capita capita per

CEU eTD Collection between the individual and/or time effects and the independent vari independent the and effects time and/or individual the between rbe. hrfr, h fxd fet mdl s oeie cal sometimes is model effects fixed the Therefore, problem. based on certain assumptions. The most common assumption made is the is made assumption common most The assumptions. certain on based fixed effects and random effects models are estimated. Next, Next, estimated. are models effects random and effects fixed homogeneity, i.e. we assume that α that assume we i.e. homogeneity, consideration. To model heterogeneity, one assumes that the composit the that assumes one heterogeneity, model To consideration. charact main the is heterogeneity that assume to reasonable ef temporal significant nor country significant neither is there variable model. variable model. in variables dummy as estimated be must effects time and estimat effects fixed the than efficient more is estimator b model effects fixed the to preferred is model effects random If effec random the variables. independent the with effect correlated is as effects fixed The variables. independent the with correlated uno the that is assumption effects random The variables. independent oe ae mlmne (ruc ad aa 18) Te et eut s results test (see B.5). country Appendix and/or effects time The 1980). Pagan and (Breusch implemented are model effects or/time country of tests multiplier Lagrange Pagan The model. benchmark the as serves model This estimated. is 6.1 equation

(3) an idiosyncratic error ε (3) error an idiosyncratic u term error country-spec the (1) components: three of consists – model twoway the hr ae w asmtos ae bu te niiul n/r ie eff time and/or individual the about made assumptions two are There o u tee osdrtos no rcie a frt h simpl the first at practice, into considerations these put To Therefore, the panel techniques are preferred to the simple simple the to preferred are techniques panel the Therefore, i , sometimes referred to as the unobserved effect, (2) the spec the (2) effect, unobserved the as to referred sometimes , it it that capturesthat errors. the residual it it = α and β and α = 195 it = β for all all for β =

r oee,i teei correlation is there if However, or. i, ti, based on the results of the pooling the of results the on based . In other words, we assume that assume we words, other In . sumption is that the unobserved unobserved the that is sumption order to solve the endogeneity endogeneity the solve to order eristic of the countries under under countries the of eristic led the least squares dummy dummy squares least the led asa ts i ue t test to used is test Hausman fect. However, it is more more is it However, fect. cue h rno effects random the ecause pooled OLS model, i.e. the i.e. model, OLS pooled ables, then the individual individual the then ables, poe OS oe of model OLS pooled e ts assumption holds, the holds, assumption ts e error νerror e ific and time-invariant and ific sre efc i not is effect bserved ific time effect and effect time ific get significant uggest one of parameter parameter of one te Breusch- the n i,t i,t cs n the and ects – in case of case in – CEU eTD Collection provides a better specification. Finally, the F test is used is test F the Finally, specification. better a provides case of the panel data used in this study. this in case panel used of data the th estimates covariance a largen rely on correlationand serial coefficientandheteroskedasticity White computing of approach main advantage of the PCSE estimator is that it estimates it that estimator is advantagemain the Parks e the model PCSE of correla serial general more to correlat robust are way this cross-sectional computed for errors standard the adjusting then AR(1) for observations the weighting suggest who (1995), Katz and effects country with model effects. s results The B.7). Appendix (see redundant are effects twoway or fi the so and hold not does assumption effects random the r that The indicate B.6). Appendix (see holds variables independent the and effects the between correlation no of assumption effects random the whether “short” panels. It general“short” to panels. also robust heteroskedasticity. is asym T large on rely not does it that is test this of advantage A in listed 10.6.3) 2002, Wooldridge (see errors in correlation serial the e supported is This errors. idiosyncratic in correlation serial model the results The B.8). in Appendix (see tested autocorrelation further was autocorrelation of presence the suggests residuals c residual first-order the computing by formed statistic Watson in autocorrelation the about made be must note a Here, effects. Second, I adopt panel-corrected standard error estimator (PCSE estimator error standard panel-corrected adopt I Second, ae o te bv, h mdl f neet s h fxd fet mode effects fixed the is interest of model the above, the on Based da wt te uoorlto polm n w wy. is, I First, ways. two in problem autocorrelation the with deal I 196

to test whether the country, temporal temporal country, the whether test to specially by Wooldridge’s test for test Wooldridge’s by specially ptotics and has good properties in in properties good has and ptotics symptotics with small T, as is theisT, as small with symptotics tion. In regard to this study, the the study, this to regard In tion. orrelation on the stacked set of set stacked the on orrelation o. h sadr errors standard The ion. ugs te rsne of presence the suggest h mdl Te Durbin- The model. the uggest the use of fixed fixed of use the uggest serial correlations and correlations serial dp Aeln (1987) Arellano adopt individual and/or time time and/or individual ) developed by Beck Beck by developed ) . The presence of of presence The . t r rbs to robust are at pni B86 An B.8.6. ppendix ven when n>T. ven when n>T. xed effects model model effects xed esults of the test test the of esults wt country with l

CEU eTD Collection both models. Contrary to the predictions of the stage of economic deve economic of stage the of predictions the to Contrary models. both Notes: White period standard errors and p-values in p-values and errors standard period White Notes: Regressions, 1865-1913Table Current 6.1: Account decreasecurrent bala account 0.128 percentageincome the leads in a to point 0.115to percent 1 A negative. is income relative the of coefficient the 0.621 0.657 0.772 0.743 R-squared Adj. gr and income relative The variables. dependent as investment and the re-estimate curr the As I6.3. and 6.2 6.1, Tables in investment, reported are results Estimation and savings between difference Sample 6: Denmark, France, Italy, Japan, United Kin United Japan, Italy, France, Denmark, 6: Sample States(USA). United (UK), Russ Norway(NOR), (JPN), Japan (ITA), Italy (GER), Canada (AUS), Australia (ARG), Argentina 14: Sample TRADEGDP TRADEGDP bevtos 2 8 5 39 45 78 92 Observations GGROWTH GGROWTH Time span 1865-1913 1870-1913 1865-1913 1870-1913 1870-1913 1865-1913 1870-1913 1865-1913 span Time GOVBAL GOVBAL R-squared 0.805 0.840 0.774 0.731 0.731 0.774 0.840 0.805 R-squared POLITY2 POLITY2 POLITY2 POLITY2 YTHDEP YTHDEP INCOME M2GDP* M2GDP* D-W stat 1.536 1.723 1.805 1.672 1.672 1.805 1.723 1.536 stat D-W M2GDP M2GDP TOTSD TOTSD Sample 14 14 6 6 6 6 14 14 Sample Fi NFAin RELY RELY country FE Model R1 AR(1) C C (0.216, 0.079) (0.216, (0.044, 0.432) (0.044, 0.323) (0.033, 0.725) (0.207, 0.005) (0.150, 0.036) (0.054, (0.004, 0.458) (0.004, (0.113, 0.529) (0.113, 0.000) (0.149, (7.724, 0.004) (7.724, 23.135 23.135 -0.384 -0.384 -0.035 -0.035 -0.434 -0.115 -0.071 -0.071 0.033 0.033 0.073 0.003 0.003 0.559 0.559 (13.231,0.283) (13.231,0.283) (0.346, 0.271) (0.346, (0.044, 0.720) (0.044, 0.056) (0.052, 0.759) (0.332, 0.025) (0.056, (0.005, 0.215) (0.005, 0.523) (0.152, (0.114, 0.386) (0.114, 0.013) (0.161, (0.175, 0.006) (0.175, PCSE FE FE PCSE country country 14.362 14.362 -0.385 -0.385 -0.016 -0.016 -0.101 -0.103 -0.128 0.098 0.098 0.007 0.007 0.100 0.100 0.413 0.505 0.505 parentheses. parentheses. gdom, United States. States. United gdom, (11.780,0.449) (11.780,0.449) 197 (0.146, 0.000) (0.146, (0.019, 0.000) (0.019, 0.240) (0.022, 0.250) (0.029, 0.504) (0.207, 0.430) (0.104, (0.004, 0.201) (0.004, 0.964) (0.161, (0.139, 0.022) (0.139, 0.828) (0.188, ia (RUS), Spain (SPA), Sweden (SWE), United Kingdom United (SWE), Sweden (SPA), Spain (RUS), ia (CAN), Denmark (DEN), France (FRA), Germany Germany (FRA), France (DEN), Denmark (CAN), FE country PCSE PCSE country FE -0.596 -0.596 -0.083 -0.083 -0.007 -0.007 -9.046 -9.046 0.088 0.088 0.027 0.034 0.140 0.006 0.006 0.337 0.337 0.041

(11.419,0.415) (11.419,0.415) (0.432, 0.600) (0.432, (0.017, 0.230) (0.017, 0.944) (0.059, 0.029) (0.062, 0.589) (0.333, 0.761) (0.033, (0.006, 0.613) (0.006, 0.465) (0.148, (0.076, 0.211) (0.076, 0.372) (0.294, (0.186, 0.014) (0.186, basic model also with savings with also model basic -0.229 -0.229 -0.144 -0.144 -0.182 -0.110 -0.110 0.021 0.021 0.004 0.010 0.003 0.003 9.444 9.444 0.974 0.974 0.267 0.490 0.490 age point increase in relative relative in increase point age owth rate are significant in in significant are rate owth lopment hypothesis, lopment ent account is the is account ent nce. nce.

CEU eTD Collection Notes: see Table 6.1. Table see Notes: M2GDP*POLITY2 Table 1865-1913 Savings 6.2: regressions, Durbin-Watson stat 1.364 2.428 2.846 1.933 1.933 2.846 2.428 1.364 stat Durbin-Watson RELYINCOME RELYINCOME Adj. R-squared 0.760 0.798 0.705 0.649 0.649 0.705 0.798 0.760 R-squared Adj. TRADEGDP TRADEGDP bevtos 2 8 5 39 45 78 92 Observations GGROWTH GGROWTH Time span 1865-1913 1870-1913 1865-1913 1870-1913 1870-1913 1865-1913 1870-1913 1865-1913 span Time GOVBAL GOVBAL R-squared 0.842 0.859 0.866 0.797 0.797 0.866 0.859 0.842 R-squared POLITY2 POLITY2 YTHDEP YTHDEP M2GDP M2GDP TOTSD TOTSD Sample 14 14 6 6 6 6 14 14 Sample Fi NFAin Model FE twoways twoways FE Model R1 AR(1) C C (11.625,0.724) (11.625,0.724) (0.057, 0.298) (0.057, 0.849) (0.234, (0.075, 0.937) (0.075, 0.834) (0.622, 0.152) (0.190, 0.641) (0.364, 0.029) (0.235, (0.009, 0.358) (0.009, (0.059, 0.160) (0.059, -0.060 -0.060 -0.045 -4.126 -4.126 -0.008 -0.008 0.006 0.006 0.131 0.276 0.171 0.526 0.084 0.084 (14.177,0.907) (14.177,0.907) (0.375, 0.474) (0.375, (0.062, 0.038) (0.062, (0.125, 0.005) (0.125, 0.032) (0.193, (0.071, 0.941) (0.071, 0.309) (0.331, 0.886) (0.338, (0.144, 0.000) (0.144, (0.005, 0.350) (0.005, (0.039, 0.000) (0.039, PCSE FE FE PCSE country country -0.132 -0.132 -0.005 -0.005 -0.340 -0.049 -1.666 -1.666 0.270 0.270 0.364 0.364 0.425 0.625 0.625 0.005 0.005 0.176 0.176 198 (10.629,0.000) (10.629,0.000) (0.617, 0.008) (0.617, (0.436, 0.389) (0.436, (0.103, 0.727) (0.103, (0.342, 0.003) (0.342, (0.433, 0.471) (0.433, (0.054, 0.161) (0.054, 0.805) (1.066, 0.335) (0.733, (0.012, 0.672) (0.012, (0.119, 0.193) (0.119, FE twoways twoways FE

-62.174 -62.174 0.0365 0.0365 -0.318 -0.318 -0.005 -0.005 0.184 0.184 0.384 0.384 1.164 1.164 0.079 0.079 0.267 0.724 0.160 0.160

(21.211,0.118) (21.211,0.118) (0.053, 0.027) (0.053, (0.414, 0.899) (0.414, (0.057, 0.365) (0.057, (0.182, 0.001) (0.182, (0.389, 0.990) (0.389, (0.088, 0.626) (0.088, 0.184) (0.873, 0.379) (0.545, (0.284, 0.546) (0.284, (0.014, 0.509) (0.014, (0.065, 0.471) (0.065, PCSE FE FE PCSE -34.465 -34.465 country country -0.053 -0.053 -0.005 -0.005 -0.174 -0.174 -0.010 -0.010 0.125 0.125 0.053 0.053 0.724 0.724 0.044 0.044 1.198 0.489 0.048 0.048 CEU eTD Collection balance. balance deteriorates (see Abel and Bernanke 2001). A 1 percentage percentage 1 A 2001). Bernanke and Abel (see deteriorates balance Notes: see table 6.1. 6.1. table see Notes: insights. The effect of the relative income and economic growth on growth economic and income relative the of effect The insights. c the in increase point percentage 0.559 to 0.413 a to leads growth economic -0.013 M2GDP*POLITY2 Investment 1865-1913 Table 6.3: regressions, economic growth accelerates demand for foreign goods and services and t and services and goods foreign for demand exp accelerates growth economic theoretical the against is This surpluses. account current run Durbin-Watson stat 1.380 1.966 1.953 1.827 1.827 1.953 1.966 1.380 stat Durbin-Watson RELYINCOME 0.237 0.237 RELYINCOME Adj. R-squared 0.767 0.803 0.725 0.0772 0.0772 0.725 0.803 0.767 R-squared Adj. TRADEGDP 0.371 0.371 TRADEGDP bevtos 3 9 5 39 45 79 93 Observations GGROWTH -0.156 -0.156 GGROWTH Time span 1865-1913 1870-1913 1865-1913 1870-1913 1870-1913 1865-1913 1870-1913 1865-1913 span Time GOVBAL 0.144 0.144 GOVBAL R-squared 0.823 0.861 0.819 0.868 0.868 0.819 0.861 0.823 R-squared POLITY2 0.802 0.802 POLITY2 YTHDEP 0.247 0.247 YTHDEP M2GDP -0.004 -0.004 M2GDP TOTSD 0.026 0.026 TOTSD Sample 14 14 6 6 6 6 14 14 Sample NFAin 0.046 0.046 NFAin Model FE country PCSE FE FE PCSE country FE Model AR(1) 0.408 0.408 AR(1) npcig h rsls rm h svn ad netet regressi investment and saving the from results the Inspecting Similarly, the sign of the GDP growth indicates that faste that indicates growth GDP the of sign Similarly,the C -22.942 -22.942 C (18.787,0.226) (18.787,0.226) (0.150, 0.016) (0.150, 0.325) (0.157, (0.099, 0.019) (0.099, (0.043, 0.545) (0.043, 0.068) (0.007, 0.086) (0.461, 0.921) (0.037, 0.313) (0.141, 0.457) (0.330, (14.820,0.137) (14.820,0.137) (0.136, 0.012) (0.136, 0.909) (0.223, (0.067, 0.000) (0.067, (0.069, 0.805) (0.069, 0.445) (0.399, 0.710) (0.276, 0.667) (0.331, (0.006, 0.341) (0.006, 0.867) (0.054, (0.184, 0.030) (0.184, -22.352 -22.352 country country -0.006 -0.006 -0.009 0.353 0.353 0.026 0.290 0.290 0.017 0.017 0.307 0.103 0.143 199 (15.389,0.057) (15.389,0.057) (0.043, 0.286) (0.043, 0.060) (0.233, 0.646) (0.158, (0.101, 0.266) (0.101, (0.051, 0.330) (0.051, 0.129) (0.494, 0.864) (0.191, 0.154) (0.376, (0.008, 0.524) (0.008, (0.066, 0.839) (0.066,

FE country PCSE PCSE country FE -30.536 -30.536 -0.005 -0.005 0.455 0.455 0.074 0.116 0.116 0.050 0.050 0.771 0.033 0.550 0.013 0.013 -0.076 -0.076 (21.538,0.422) (21.538,0.422) (0.040, 0.568) (0.040, 0.074) (0.173, (0.400, 0.643) (0.400, (0.097, 0.232) (0.097, (0.853, 0.013) (0.853, 0.966) (0.295, 0.754) (0.599, (0.079, 0.712) (0.079, (0.013, 0.120) (0.013, (0.055, 0.698) (0.055, (0.234, 0.749) (0.234, r growing countries tended to to tended countries growing r -17.640 -17.640 -0.188 -0.188 -0.030 -0.030 -0.022 -0.022 0.023 0.023 0.323 0.119 0.119 2.297 2.297 0.013 0.190 0.022 0.022 the current account is less less is account current the cain ta domestic that ectations n yed additional yields ons he current account current he point increase in in increase point urrent account account urrent CEU eTD Collection percentage point increase in economic growth economicpercentage in a 0.526increase to 0.425to increase leads point savin in A regressions. investment and savings the at looking when puzzling by5. of Chapter the results listed in Table below. in listed 6.4and 6.5 effe this whether see and percentile 10 high and low mean, as (or M plug to of some meaningful in POLITY2 values vice of interest is versa), it INVESTMENT on POLITY2 of effect partial the estimate To t with interaction the by mitigated is POLITY2 of effect the i of case in Furthermore, investment. in increase point percentage 0.802 i in increase point 1 a e where investment, this of case but in significant investment and savings the both on effect positive a has instit channels, and higher investment at the savings balance.CA looking When percentage-p 0.384 a to leads POLITY2 in increase point 1 a model, FE

netet u a efc o a ihr cnmc rwh n aig i m is savings on growth economic higher a of effect an but investment point percentage 0.026 to –0.156 a to leads growth economic the in increase dependency significant. not is onsavings t Interestingly, account. current the in decrease point percentage 0.434 yout the in increase point percentage 1 A predictions. theoretical the importance of temporary shocks in determining the current account current the determining in shocks temporary of importance the (see significant highly is it data, yearly the regressing h efc o te ot dpnec o te urn acut s n ie w line in is account current the on dependency youth the of effect The The institutional quality has a negative effect on the current account current the on effect negative a has quality institutional The insig albeit positive, is balance government the of effect The 200

robustness tests below). This suggests This below). tests robustness he level of financial development. financial of level he ct is significant. The results are results The significant. is ct nstitutional quality leads to a a to leads quality nstitutional conditional on M2GDP (and M2GDP on conditional dpnec las o a to leads dependency h nificant. However, when when However, nificant. balance, as suggested suggested as balance, nvestment regression, nvestment ffect is stronger and and stronger is ffect oint decrease in the in decrease oint 1 percentage-point percentage-point 1 e fet f youth of effect he . According to the to According . c hge. 1 A higher. uch utional qualityutional change in the in change 2GDP), such 2GDP), such t the ith gs. gs. CEU eTD Collection better in capturing the current account behavior between 1865 and 1913. and 1865 between behavior account current the capturing in better and low10 percentiat maximum minimum, onlyNote the that effect significant is Notes: see table 6.1. table see Notes: Notes: see table 6.1. 6.1. table see Notes:

M2GDP of Effect INVESTMENT onPOLITY2 on Table Effect 6.5: of conditional M2GDP POLITY2 of Effect INVESTMENTTable onM2GDP conditional Effect on 6.4: of POLITY2 currentaccount insignificant.Here, is the balance. effect however, a predicts model FE the contrary, the On balance. account current le M2GDP in increase point percentage 1 a that predicts model models two the between balance account current the on effect M2GDP is there However,insignificant. albeit magnitude, same the of is higher investment rates, whereas the opposite is true for high v highfor true is opposite the whereas rates, higherinvestment channel. The results, thus, give some support to the global savings global the to support some give thus, results, The channel. com account current the on development financial the of effect main Value of M2GDP Minimum Low 10 10 Low Minimum M2GDP ofValue (12.96, 87.25) (12.96, (12.96, 87.25) 12.96 19.42 40.25 71.28 87.25 87.25 71.28 40.25 19.42 12.96 87.25) (12.96, POLITY2 POLITY2 -0 0 -0 48 15 94 10 9.46 1.52 -4.86 -10 10) (-10, Value ofValue (-10, 10) 10) (-10, According to the PCSE model, the effect of POLITY2 on the current the on POLITY2 of effect the model, PCSE the to According

h ipid urn acut (pedx .) ugs ta te E mod FE the that suggest B.9) (Appendix accounts current implied The institutional in improvement development, financial of levels low For

(0.061, 0.043) (0.061, (0.372, 0.092) (0.372, Minimum Minimum 0.125 0.125 0.636 0.636 (0.036, 0.107) (0.036, (0.329, 0.097) (0.329, percentile percentile Low 10 10 Low percentile percentile 0.059 0.059 0.553 0.553 (0.043, 0.592) (0.043, 201 (0.190, 0.137) (0.190, -0.023 -0.023 Mean Mean

Mean High 10 10 High Mean 0.286 0.286 (0.089, 0.166) (0.089, (0.077, 0.149) (0.077, percentile percentile High 10 10 High percentile percentile -0.125 -0.125 alues of financial development. financial of alues ads to a 0.101 reduction in the in reduction 0.101 a to ads -0.113 -0.113 a difference in the sign of the of sign the in difference a es through the investment investment the through es glut hypothesis that the the that hypothesis glut .3 ices i the in increase 0.033 (0.093, 0.159) (0.093, (0.162, 0.054) (0.162, Based on this, the this, on Based maximum maximum f neet PCSE interest. of maximum maximum -0.132 -0.132 -0.318 -0.318 quality leads to to leads quality account balance account le. le. el performs performs el CEU eTD Collection od akt eeomn. t s hrfr psil t seuae w speculate, to possible therefore is It development. market bond o te nta vle f h nt oeg assets. foreign net the of value initial the for estima report 6.3 and 6.2 6.1, tables of columns two last the Britain, the high 10 percentile value. instituti of level British the nowadays), U.S. the (unlike that noted of sample broad a for available not are data such Unfortunately, b and stock as measured if different be would development financial fixed onlythe on relies results of interpretation le high the capture to seem not does M2GDP Therefore, Germany. bank and Britain Great in system financial based market stock ref probably This M2GDP. highest the had that countries Scandinavian le average only reached Britain Great Measurof development financial development. financial the of proxy the about made be must institutiona and Fr financial of degree Britain, high with countries Great to distributed by accumulated case this in savings, excess 106 positive significant a has openness trade Finally, surpluses). a current run to tend deepening financial and quality institutional countrie that suggests This negative. remains institutiona development the financial both of effect The points. percentage 0.184 by savings ne in increase point percentage 1 a where channel, savings the Thi points. percentage i 0.088 by balance point account current the percentage increased 1 a balance: account current the of a determinant foreign net the that suggest results The States. United the and Japa Italy, France, Denmark, countries: following the only includes oe ht h A tr ws ninfcn i bt th both in insignificant was term AR the that Note As the role of income from foreign investment played a significa a played investment foreign from income of role the As

effects model. model. effects 202 106

u t te aa nviaiiy te sample the unavailability, data the to Due e savings and investment regressions. Thus, the the Thus, regressions. investment and savings e effect on the current account: the account: current the on effect vel, in contrast to Germany or Germany to contrast in vel, t foreign assets increased the the increased assets foreign t countries. Second, it must be must it Second, countries. vel of the British stock and stock British the of vel based financial system in in system financial based onal quality did not reach not did quality onal ance or Germany, were were Germany, or ance cut eiis o lower (or deficits ccount ond market development. development. market ond ssets were an important important an were ssets hether the effect of the the of effect the hether n, the United Kingdom, Kingdom, United the n, s with higher levels of of levels higher with s tion results controlling results tion l development. A note A development. l lects the dominance of dominance the lects s effect came through through came effect s ncrease in the NFA NFA the in ncrease nt role in the prewar the in role nt d s 2D, the M2GDP, as ed l quality and the the and quality l CEU eTD Collection by 0.054 to 0.078 percentage point and investment by 0.051 percentage point. H point. percentage 0.051 by investment and point percentage 0.078 to 0.054 by balance than the effect of other variables. balance the effect of than point increase in institutional quality leads to a 0.328 percentage 0.328 a to leads quality institutional in increase point decreases also quality institutional Higher model). (FE points ewe te ot dpnec ad h cret con i ngtv: 1 p 1 a negative: is account current the and dependency youth the between B.11). between (Appendix model increase in M2GDP leads to a to 0.374increaseincrease savings. leads M2GDP in in positive: is savings and M2GDP between relationship the long-run, the de M2GDP in increase point percentage 1 A investment. the and savings tests6.3.2 Robustness fore net the of effect stronger a or size sample smaller differ The 12.9%. of p-value the has investment qualityon institutional significant marginally or insignificant are variables Other the higher the trade, international the in participation the higher account balance (PCSE model). account(PCSE balance bala account current the decreases dependency youth in increase long-run, the in account current the influencing factors for control are interest of models the above, listed criteria the on Based models agai robust errors the standard period White computed I autocorrelation, As B.10). (Appendix data annual using regressions panel the In order to examine the robustness of the results at higher fre higher at results the of robustness the examine to order In In general, the results support the regression using 5-year aver 5-year using regression the support results the general, In Interestingly, the financial development has a significant ne significant a has development financial the Interestingly, 203

ign assets on the current account account current the on assets ign Fr xml, h efc o the of effect the example, For . FE and PCSE. Furthermore, to to Furthermore, PCSE. and FE the current account balance: a 1 1 a balance: account current the point decrease in the current current the in decrease point current account balance. balance. account current c b 032 percentage 0.362 by nce nst serial autocorrelation. serial nst gative effect on both the the both on effect gative quencies, I reestimated I quencies, ence may be due to the to due maybe ence ages. The relationship The ages. a 1 percentage point point percentage 1 a etmtd lo the also estimated I creases the savings savings the creases ercentage-point suffered from from suffered owever, in in owever, CEU eTD Collection point. point. percentage point increase leads to a 0.265 percentage point increas point percentage 0.265 a to leads increase point percentage balance. This points out to the importance of the temporary shoc temporary the of importance the to out points This balance. y .4 pretg pit. hs ugss ht h gvrmn bde b budget government the that suggests This points. percentage 0.149 by government budget balance leads to a 0.182 percentage point increase i increase point percentage 0.182 a to leads balance budget government pe 1 a short-term: the in significant is it medium-term, the in balance. budget government the of significance the in is averages Ricardian effect on the savings rate, where the Ricardian offset Ricardian the where rate, savings the on effect Ricardian and 5.374 increase in investment. and 5.374increase investment. in the in decrease point percentage 1-pe 4.592 a to a leads growth economic predictions: theoretical the with line in is coefficient i howev Here, investment. most and balance account single current the both determines the is income relative long-run, ac the current In the on insignificant. income relative the of effect the result, a As point percentage 0.207 to 0.143 a to leads income relative in increase a stronger: is investment on effect The point. percentage 0.111 to 0.105 relati in increase point percentage 1 a balance: account current re Higher development. economic the of effect the into insights regre investment and savings the However, regression. account current

account (see 5). balance Chapter magnitude: a 1-percentage point increase in the government budget bal budget government the in increase point 1-percentage a magnitude: ete rltv icm, o got rt cefcet were coefficients rate growth nor income, relative Neither Finally, the trade openness has a positive effect on both savi both on effect positive a has openness trade the Finally, h mjr ifrne ewe te ersin uig h yearly the using regressions the between difference major The The effect of an increase in the government budget balance on savi on balance budget government the in increase an of effect The 204

ve income increases savings by by savings increases income ve rcentage point increase in the the in increase point rcentage in savings is 0.85 percentage 0.85 is savings in lative income leads to higher to leads income lative ks in determining the current the determining in ks cnae on ices in increase point rcentage Whereas it is insignificant insignificant is it Whereas infcn i cs o the of case in significant on i ngtv, albeit negative, is count e in savings and a 0.301 a and savings in e ngs and investment: A 1 A investment: and ngs current account balance balance account current increase in investment. investment. in increase ance increases savings savings increases ance n the current account account current the n mportant factor that that factor mportant 1 percentage point point percentage 1 sos rn more bring ssions lne a a non- a has alance data and 5-year 5-year and data ngs is of a similar similar a of is ngs er, the sign of the of sign the er, CEU eTD Collection ecnae on ices i ivsmn. hs ugss ht n inc an that suggests This investment. in increase point percentage provide the evidence for the latter. thelatter. for the evidence provide ntttoa qaiy r hte tee ifrne cpue also capture macroeconomic fundamentals. differences these whether or quality institutional res the solely are they whether debatable is it country, the of 108 France or Germany.or France countrie European developed include not does and smaller is sample c may SPREAD of effect the in difference The insignificant). countries developed financially in balance CA the increases it of deepe financial lowlevels with countries in decreases balance CA the qual institutional in increase An results. base the from different quality institutional of effect the However, SPREAD. of levels deve financial the of effect The regression. base the to s compared are There fundamentals. economic by explained not risk investment yield (2004) and Clemens prox as Williamson used a British SPREAD consols. and the on yield the between difference the measures which 2006), Schularick and S used I Second, insignificant. was effect its Surprisingly, B.12). ris the of proxy a as executive the on constraint used I First, the(2) in profitable investment in an export-oriented increase businesses reve to due savings in increase an (1) to leads trade international 107 Ferguson and Schularick (2006) provide some eviden some provide (2006) Schularick and Ferguson RUS, NOR, ITA, DEN, CAN, AUS, ARG, sample: SPREAD To test the robustness of the results, I used two further proxie further two used I results, the of robustness the test To 107 Second, although the differences in spreads signal the creditworthi the signal spreads in differences the although Second,

108

205 ce for the former, whereas Flandreau and Zumer (200 Zumer and Flandreau whereas former, the for ce

SPA, SWE, USA. USA. SWE, SPA, ome from two sources. First, the First, sources. two from ome ult of differences in underlying in differences of ult k of expropriation (Appendix (Appendix expropriation of k ity, i.e. a decrease in spread, spread, in decrease a i.e. ity, (here, however, the effect is is effect the however, (here, nue generated by trade, and trade, by generated nue PREAD variable (Ferguson variable PREAD esrd s PED is SPREAD as measured lopment is negative at all all at negative is lopment s of institutional quality. institutional of s s, such as Great Britain, Britain, Great as such s, h dfeecs n the in differences the esn priiain in participation reasing ning. On the contrary, On ning. . . on a country’s bond bond country’s a on al discrepancies mall ness y of 4) CEU eTD Collection period of 1970-2007. To capture the medium-term effects, 5-year non-ove 5-year effects, medium-term the capture To 1970-2007. of period u te ersin lo o vros onr gop (developed/develop groups country various excluding Africa). for also regression the run C and Ito As 6.8. and 6.7 6.6, Tables develo in and reported developed are for CA results the Estimation of determinants different documented 6.4.1 Estimation results average real per capita income of the high-income OECD countriesaverage (RELY capita of theper real high-income income per real and (KAOPEN) openness capital the between is 54.2% The B.16). Appendix (see 50% than higher significantly is variables of None tests). robustness (see GDP of percent –10 than lower wi countries all exclude I where tests, robustness perform I capturethe To statistics). the descriptivefor 18 Appendix (see bal CA mean the with 99, of maximum the to –240 of minimum the from Currentof the Medium-term Account Determinants 6.4 Appendix B.13). of B.14. variablesAppendix sources Appendix list The in listed complete and is ba (this developing 86 developed, 21 – countries 107 covers dataset The section (see used are averages cross-section and data yearly determ short-term and long-term the capture to and results the of To used. is average 3-year a 2005-2007, of period last the For used. are

This section deals with the medium-term determinants of the CA CA the of determinants medium-term the with deals section This Between 1970 and 2007, the current account balance as a percentage of G of percentage a as balance account current the 2007, and 1970 Between 206

th the CAGDP higher than 10 or or 10 than higher CAGDP the th on the robustness of the results). the of robustness the on sensitivity of results to outliers, to results sensitivityof the correlations of explanatory of correlations the Balance,1970-2007 inants of the current account, account, current the of inants capita income relative to the to relative income capita ihs creain of correlation highest se sample is listed in in listed is sample se check the robustness robustness the check ance equal to –2.571 –2.571 to equal ance ping countries, I re- I countries, ping OECD). OECD). balance during the the during balance rlapping averages averages rlapping ing/developing ing/developing in (2007) hinn DP ranged DP

CEU eTD Collection balance. Looking at the savings and investment regressions sheds mor sheds regressions investment and savings the at Looking balance. rxe a piae rdt rain CEI) Tee a perce 1 a There, (CREDIT). creation credit private as proxied point decrease in the current account balance. This effect is dr is effect This balance. account current the in decrease point le average OECD the to relative capita per in increase point economic growth rate leads to a 0.376 percentage point decrease in in decrease point percentage 0.376 a to leads rate growth economic account deficits. ec growing faster the and richer the both that suggest results in significant more and stronger is effect the but investment and increases growth economic Faster account. current the on growth economic percentag savingson the 0.548 savingsrate, the 0.321to Ricardian is in where offset balanc budget government the that suggests This rate. savings in per 0.679 to 0.452 to leads increase point percentage 1 a positive: also government the in increase an of effect The hypothesis. deficits results These account. current the in increase point percentage 0.647 b budget the in increase point percentage 1 A account. current the

ofiin i ngtv a epce bt infcn ol we the when only significant but expected as negative is econom coefficient the of sign The 0.152). to (0.071 investment on RELYOECD of effect cur the and capita per income relative the between relationship Second, there is a positive relationship between the government b government the between relationship positive a is there Second, First, contrary to the stages of economic development hypothesi development economic of stages the to contrary First, 207

ads to 0.084 to 0.158 percentage 0.158 to 0.084 to ads iven by the significant positive positive significant the by iven nme tn t rn current run to tend onomies budget balance on savings is is savings on balance budget rent account: a 1-percentage a account: rent e has a non-Ricardian effect non-Ricardian a has e tg pit nrae n the in increase point ntage case of investment. These investment. of case financial development is is development financial alance leads to a 0.341 to to 0.341 a to leads alance give support to the twin twin the to support give e light on the effect of effect the on light e centage point increase increase point centage s, there is a negative negative a is there s, the current account account current the udget balance and balance udget both the savings the both c growth ic e point. e point. CEU eTD Collection

Table 6.6: Current account regressions, 1970-2007

FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways Fe country 3.564 15.603 14.716 2.467 10.436 13.488 14.256 25.083 14.558 C (6.808, 0.601) (7.146, 0.031) (6.961, 0.037) (6.484, 0.704) (10.118, 0.306) (8.972, 0.135) (8.222, 0.085) (10.992, 0.024) (8.470, 0.088) 0.039 -0.051 -0.084 0.047 -0.144 -0.121 -0.116 -0.158 -0.114 RELYOECD (0.043, 0.366) (0.050, 0.312) (0.042, 0.049) (0.044, 0.284) (0.046, 0.003) (0.047, 0.011) (0.043, 0.008) (0.059, 0.008) (0.047, 0.017) -0.217 -0.185 -0.092 -0.266 0.502 0.024 -0.056 -0.100 0.386 POLITY2 (0.172, 0.209) (0.203, 0.364) (0.156, 0.558) (0.163, 0.105) (0.214, 0.022) (0.211, 0.911) (0.150, 0.709) (0.380, 0.794) (0.339, 0.257) -0.001 -0.064 -0.060 -0.074 0.169 0.002 -0.014 -0.237 1.209 FD (0.032, 0.967) (0.030, 0.035) (0.040, 0.142) (0.033, 0.027) (0.063, 0.009) (0.009, 0.834) (0.038, 0.712) (0.509, 0.642) (0.555, 0.031) 1.451 -0.449 -0.765 0.532 0.292 -0.808 -0.395 -0.739 -0.680 KAOPEN (0.794, 0.069) (0.898, 0.618) (0.792, 0.336) (0.743, 0.475) (0.833, 0.727) (0.767, 0.294) (0.680, 0.562) (1.194, 0.538) (0.991, 0.494) 0.341 0.359 0.250 0.447 0.647 0.153 0.157 0.509 0.398 GOVBAL (0.110, 0.002) (0.194, 0.067) (0.183, 0.173) (0.122, 0.000) (0.364, 0.080) (0.201, 0.448) (0.183, 0.393) (0.244, 0.039) (0.204, 0.054) 0.001 0.038 0.044 0.060 -0.002 0.050 0.039 0.034 0.032 NFAIN (0.002, 0.544) (0.031, 0.224) (0.028, 0.124) (0.025, 0.018) (0.021, 0.904) (0.034, 0.138) (0.028, 0.164) (0.029, 0.237) (0.033, 0.326) -0.040 -0.172 -0.198 0.041 -0.195 -0.118 -0.150 -0.258 -0.226 DEPR (0.074, 0.590) (0.085, 0.046) (0.093, 0.034) (0.077, 0.597) (0.148, 0.190) (0.094, 0.212) (0.100, 0.135) (0.160, 0.108) (0.123, 0.070) 0.000 0.003 0.004 0.003 -0.017 -0.001 0.003 0.073 -0.038 POLITY2*FD (0.003, 0.938) (0.002, 0.216) (0.004, 0.355) (0.004, 0.453) (0.008, 0.035) (0.002, 0.576) (0.004, 0.530) (0.069, 0.290) (0.059, 0.522) -0.055 -0.021 0.018 -0.055 -0.044 0.076 0.073 -0.031 0.049 POLITY2*KAOPEN (0.081, 0.499) (0.083, 0.805) (0.069, 0.795) (0.077, 0.478) (0.122, 0.721) (0.054, 0.157) (0.062, 0.251) (0.087, 0.720) (0.087, 0.574) -0.026 0.004 0.009 -0.012 -0.015 0.003 -0.004 0.034 -0.078 KAOPEN*FD (0.008, 0.002) (0.007, 0.558) (0.012, 0.445) (0.010, 0.247) (0.024, 0.532) (0.007, 0.704) (0.012, 0.738) (0.157, 0.830) (0.210, 0.713) -0.014 0.060 0.049 0.006 0.082 0.003 0.010 -0.028 -0.027 TRADEGDP (0.032, 0.668) (0.036, 0.096) (0.036, 0.169) (0.030, 0.833) (0.042, 0.056) (0.043, 0.939) (0.041, 0.805) (0.057, 0.628) (0.050, 0.586) -0.201 -0.364 -0.198 -0.376 -0.244 -0.314 -0.309 -0.169 -0.122 ECONGROWTH (0.131, 0.128) (0.260, 0.165) (0.247, 0.423) (0.185, 0.043) (0.280, 0.386) (0.250, 0.211) (0.256, 0.230) (0.212, 0.427) (0.201, 0.541) -0.008 PBBM*GOVBAL (0.004, 0.084) R-squared 0.727 0.833 0.819 0.760 0.862 0.809 0.803 0.855 0.852 Adj. R-squared 0.606 0.710 0.691 0.653 0.758 0.677 0.670 0.729 0.732 Durbin-Watson stat 2.446 2.718 2.648 2.119 2.122 2.578 2.603 2.632 2.765 Countries 107 68 73 96 43 73 73 87 86 Observations 409 199 216 371 136 219 224 219 218 Time spam 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1975 - 2007 1990 - 2007 1990 - 2007 Notes: see table 6.1.

208 CEU eTD Collection

Table 6.7: Savings regressions, 1970-2007

FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE country FE country FE country FE country FE country FE country FE country FE country FE country 17.232 35.126 30.400 23.642 32.143 34.709 24.222 36.470 39.142 C (7.995, 0.032) (9.147, 0.000) (9.535, 0.002) (8.462, 0.006) (16.084, 0.049) (10.748, 0.002) (7.405, 0.001) (11.079, 0.001) (11.375, 0.001) 0.074 0.027 0.029 0.074 -0.045 1.537 0.051 0.008 -0.003 RELYOECD (0.042, 0.081) (0.049, 0.581) (0.040, 0.470) (0.041, 0.069) (0.037, 0.231) (4.037, 0.704) (0.037, 0.168) (0.045, 0.851) (0.043, 0.949) 0.118 -0.369 -0.134 0.062 0.619 -0.030 -0.019 -0.090 0.136 POLITY2 (0.190, 0.534) (0.265, 0.167) (0.237, 0.574) (0.260, 0.812) (0.329, 0.064) (0.245, 0.904) (0.200, 0.925) (0.558, 0.872) (0.472, 0.773) 0.099 -0.056 -0.039 0.022 0.138 0.192 -0.003 -0.425 -0.087 FD (0.038, 0.011) (0.036, 0.129) (0.051, 0.443) (0.077, 0.772) (0.074, 0.065) (1.245, 0.878) (0.042, 0.944) (0.724, 0.558) (0.787, 0.913) 1.734 -1.032 -1.299 0.032 1.949 -1.662 -0.983 -1.255 -0.462 KAOPEN (1.087, 0.112) (1.298, 0.428) (1.140, 0.257) (1.000, 0.975) (1.680, 0.250) (1.191, 0.165) (1.188, 0.409) (2.724, 0.646) (3.103, 0.882) 0.496 0.503 0.505 0.452 0.671 0.329 0.271 0.679 0.677 GOVBAL (0.151, 0.001) (0.315, 0.114) (0.338, 0.138) (0.166, 0.007) (0.276, 0.017) (0.298, 0.271) (0.261, 0.301) (0.272, 0.014) (0.260, 0.011) 0.019 0.022 0.025 0.031 0.017 3.645 0.037 0.045 0.047 NFAIN (0.015, 0.188) (0.023, 0.335) (0.024, 0.295) (0.020, 0.114) (0.024, 0.482) (3.158, 0.251) (0.028, 0.187) (0.029, 0.126) (0.032, 0.148) -0.041 -0.185 -0.148 -0.090 -0.194 -0.183 -0.071 -0.153 -0.215 DEPR (0.078, 0.602) (0.100, 0.068) (0.102, 0.151) (0.084, 0.285) (0.239, 0.421) (0.120, 0.129) (0.085, 0.407) (0.194, 0.430) (0.191, 0.262) -0.002 0.005 0.003 -0.004 -0.019 0.029 0.003 0.049 0.007 POLITY2*FD (0.004, 0.604) (0.003, 0.058) (0.005, 0.489) (0.009, 0.667) (0.010, 0.065) (0.173, 0.867) (0.005, 0.588) (0.080, 0.545) (0.096, 0.939) POLITY2*KAOPE 0.110 0.035 0.038 0.050 -0.190 0.101 0.096 -0.092 -0.118 N (0.103, 0.291) (0.130, 0.792) (0.116, 0.746) (0.109, 0.647) (0.150, 0.210) (0.117, 0.381) (0.104, 0.362) (0.239, 0.703) (0.257, 0.647) -0.057 -0.001 -0.003 -0.013 -0.012 0.352 -0.010 0.299 0.237 KAOPEN*FD (0.017, 0.001) (0.010, 0.888) (0.016, 0.845) (0.019, 0.488) (0.037, 0.735) (0.709, 0.621) (0.015, 0.487) (0.186, 0.110) (0.228, 0.301) -0.004 0.019 0.019 0.016 -0.015 -0.026 0.0003 -0.050 -0.062 TRADEGDP (0.038, 0.919) (0.052, 0.721) (0.044, 0.672) (0.035, 0.641) (0.044, 0.743) (0.041, 0.528) (0.031, 0.992) (0.039, 0.211) (0.038, 0.101) 0.262 0.378 0.488 0.233 0.490 0.320 0.397 0.558 0.568 ECONGROWTH (0.111, 0.019) (0.340, 0.269) (0.311, 0.120) (0.155, 0.135) (0.304, 0.111) (0.308, 0.301) (0.252, 0.117) (0.184, 0.003) (0.197, 0.005) -0.008 PBBM*GOVBAL (0.005, 0.114) R-squared 0.848 0.876 0.886 0.811 0.928 0.896 0.891 0.908 0.905 Adj. R-squared 0.784 0.786 0.806 0.734 0.875 0.827 0.820 0.831 0.826 Durbin-Watson stat 1.482 2.102 2.093 1.369 1.798 2.054 2.052 2.405 2.418 Countries 95 63 67 87 41 66 67 77 76 Observations 358 176 190 339 127 193 197 196 194 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1975 - 2007 1975 - 2007 1990 - 2007 1990 - 2007 Notes: see table 6.1.

209 CEU eTD Collection

Table 6.8: Investment regressions, 1970-2007

FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE twoways FE twoways FE twoways FE country FE twoways FE twoways FE twoways FE twoways 14.069 12.588 11.601 11.422 29.125 13.384 10.450 13.249 19.916 C (5.898, 0.018) (4.345, 0.005) (4.914, 0.020) (5.448, 0.037) (8.240, 0.001) (6.557, 0.043) (5.209, 0.047) (7.718, 0.089) (7.291, 0.007) 0.071 0.072 0.118 0.073 0.035 0.142 0.152 0.142 0.122 RELYOECD (0.026, 0.007) (0.036, 0.050) (0.026, 0.000) (0.029, 0.013) (0.035, 0.310) (0.026, 0.000) (0.026, 0.000) (0.035, 0.000) (0.034, 0.000) 0.365 -0.117 -0.074 0.309 0.014 -0.117 0.027 -0.052 -0.097 POLITY2 (0.161, 0.024) (0.128, 0.363) (0.083, 0.374) (0.167, 0.066) (0.187, 0.939) (0.113, 0.306) (0.094, 0.774) (0.240, 0.828) (0.161, 0.549) 0.061 0.040 0.040 0.108 -0.023 -0.001 0.013 0.001 -0.659 FD (0.031, 0.050) (0.023, 0.083) (0.024, 0.094) (0.042, 0.012) (0.064, 0.718) (0.006, 0.924) (0.017, 0.435) (0.422, 0.999) (0.358, 0.069) -0.005 0.060 -0.062 -0.158 1.490 -0.508 -0.325 -0.718 -0.742 KAOPEN (0.604, 0.993) (0.649, 0.927) (0.556, 0.912) (0.601, 0.794) (0.749, 0.050) (0.601, 0.399) (0.538, 0.547) (0.826, 0.387) (0.696, 0.289) -0.053 -0.096 -0.053 -0.033 0.251 0.051 0.028 0.082 0.115 GOVBAL (0.088, 0.546) (0.112, 0.396) (0.120, 0.661) (0.096, 0.733) (0.324, 0.441) (0.135, 0.710) (0.141, 0.844) (0.140, 0.561) (0.139, 0.409) 0.003 0.018 0.015 0.021 0.009 0.015 0.020 0.017 0.011 NFAIN (0.002, 0.175) (0.011, 0.088) (0.012, 0.236) (0.015, 0.175) (0.013, 0.521) (0.009, 0.099) (0.014, 0.162) (0.013, 0.186) (0.012, 0.373) -0.051 0.005 0.026 -0.007 -0.113 -0.015 -0.001 0.039 -0.012 DEPR (0.063, 0.414) (0.056, 0.925) (0.053, 0.625) (0.060, 0.902) (0.123, 0.363) (0.061, 0.802) (0.059, 0.985) (0.099, 0.696) (0.097, 0.905) -0.006 0.001 0.0004 -0.008 -0.003 0.001 0.001 -0.001 0.013 POLITY2*FD (0.003, 0.064) (0.002, 0.715) (0.002, 0.807) (0.004, 0.051) (0.009, 0.772) (0.001, 0.086) (0.002, 0.668) (0.045, 0.983) (0.040, 0.751) 0.066 0.060 0.021 0.076 -0.142 0.005 0.003 -0.014 -0.047 POLITY2*KAOPEN (0.045, 0.143) (0.055, 0.272) (0.044, 0.635) (0.048, 0.117) (0.092, 0.126) (0.041, 0.911) (0.048, 0.952) (0.049, 0.780) (0.052, 0.363) -0.007 -0.009 -0.013 -0.007 -0.006 -0.002 -0.006 0.204 0.267 KAOPEN*FD (0.009, 0.450) (0.006, 0.116) (0.008, 0.082) (0.012, 0.535) (0.019, 0.749) (0.004, 0.628) (0.008, 0.471) (0.153, 0.185) (0.151, 0.081) 0.073 0.011 0.026 0.050 -0.037 0.041 0.060 0.010 0.009 TRADEGDP (0.027, 0.007) (0.046, 0.813) (0.041, 0.533) (0.027, 0.065) (0.037, 0.327) (0.040, 0.307) (0.042, 0.150) (0.055, 0.860) (0.055, 0.864) 0.463 0.804 0.693 0.555 0.631 0.802 0.694 0.526 0.436 ECONGROWTH (0.125, 0.000) (0.238, 0.001) (0.222, 0.002) (0.133, 0.000) (0.269, 0.021) (0.196, 0.000) (0.220, 0.002) (0.176, 0.003) (0.156, 0.006) -0.003 PBBM*GOVBAL (0.005, 0.516) R-squared 0.789 0.889 0.894 0.788 0.909 0.886 0.873 0.895 0.896 Adj. R-squared 0.708 0.809 0.820 0.704 0.848 0.809 0.790 0.807 0.809 Durbin-Watson stat 1.484 2.715 2.571 1.477 2.192 2.670 2.463 2.581 2.579 Countries 107 68 73 96 43 73 73 87 86 Observations 452 201 218 401 138 223 228 223 221 Time span 1970 - 2007 1975 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1975 - 2007 1975 - 2007 1990 - 2007 1990 - 2007 Notes: see table 6.1.

210 CEU eTD Collection percentage point increase in the budget balance raises the c the raises balance budget the in increase point percentage increase in the NFA leads to a 0.060 percentage point increase aincrease to 0.060 percentage the in NFA leads the bal point CA in developm financial the of proxy the as CREDIT with regressions is assets foreign net of levels initial of effect the Fourth, fina the of proxies as used are OVERHEAD and STOCK SIZE, when effec This account. current the in decrease point percentage 0.226 to 0.172 t in increase point percentage 1 A expected. as balance account

decade. decade. imbalances global the capture better to enables span time sample. the in economies emerging or post-communist more include time longer The 2007. through 1970 of period the for countries developing a developed chapter 21 encompasses the sample 2005,this of through the period of 1986 developing 70 and industrialized 19 of sample the encompasses (2007) Chinn Whe role. the play might span time the and composition its size, possib discuss to interest of is it model, same the estimates signi statistically not is variable budget the where (2007), Chinn and results the hand, other the On frequencies. higher at (2007) Aristovnik a East Middle for and 2009) (Morsy countries oil-exporting for also fisca of role The countries. industrialized for point percentage 0.49 where (2009), Ito and 2004; through 1971 of period the for countries industrialized 0.1 by balance CA the increases balance budget the in increase CA balance.CA participation the international higher in the trade, hig the The hs rsls r i ln wt Cin n Io 20a, hr a n pe one a where (2007a), Ito and Chinn with line in are results These TRADEGDP, a variable emphasized by the policy-makers has has policy-makers the by emphasized variable a TRADEGDP, rat dependency the between relationship negative a is there Third, 211

positive albeit significant only in in only significant albeit positive phenomenon related to the past past the to related phenomenon le explanations. First, the sample sample the First, explanations. le urrent account balance by 0.10- by balance account urrent he dependency rate leads to a to leads rate dependency he reas the analysis of Ito and and Ito of analysis the reas 04 pretg pit for point percentage -0.49 l balance was documented documented was balance l ent: a 1 percentage point point percentage 1 a ent: nd North Africa countries countries Africa North nd Furthermore, the longer the Furthermore, a positive effect on the on effect positive a iat A ti chapter this As ficant. stand in contrast to Ito to contrast in stand her the CA balance. the balance. CA her ca development. ncial t is significant only only significant is t ance. e and the current current the and e span enables to to enables span rcentage point point rcentage countries for for countries one a nd 86 CEU eTD Collection y .7 pretg pit. h efcec o te akn sco wa sector banking the of efficiency The points. percentage 0.074 by quality. quality. leve high to average and M3GDP) as (measured development financial f balance CA the reduces openness capital the in increase an inst and openness capital the both of levels high the with countries effect negative significant a has M3GDP the in increase an hand, s openness capital low and quality institutional of level low with positive, is balance CA the on effect Its deepening. financial used is M3GDP B.19). Appendix (see balance budget government the and la the openness, capital the with former the term; interaction

decreases the CA balance by 1.209 percentage points. decreases by the balance CA 1.209 percentage points. percentage 1 A balance. CA the lower the assets, total its of the lower the i.e. sector, banking the of performance cost the balance CA the on effect positive significant a has OVERHEAD CRE in increase point 1-percentage a significant: is CREDIT is STOCK of effect the whereas but balance CA the on effect B SIZE. with regression the for results the driving is SIZE of variab two these of effect separate the examine to interest (STO capitalization market stock the of sum the as measured perce 0.064 by balance CA the decreases SIZE in increase point 1 effec negative significant a has market financial the of Size sample size down to the maximum of 79(see B.18). Appendix down the insignifica maximum to sample The size effect is Finally, the estimation results give some support also to the s the to also support some give results estimation the Finally, da the because separately tested was TOTSD of effect The w pois f iaca dvlpet MGP n PB) ae s a have PBBM) and (M3GDP development financial of proxies Two 212

les to see, which of the components the of which see, to les t on the current account balance: a a balance: account current the on t tter with the institutional quality institutional the with tter albeit insignificant, for countries countries for insignificant, albeit point decrease in OVERHEAD OVERHEAD in decrease point bank’s overhead costs as a share share a as costs overhead bank’s or countries with high levels of of levels high with countries or DIT decreases the CA balance CA the decreases DIT oth variables have a negative negative a have variables oth CK) and (CREDIT), it is of of is it (CREDIT), and CK) . This suggests that the better better the that suggests This . insignificant, the effect of of effect the insignificant, uch as China. On the other other the On China. as uch itutional quality. Similarly, Similarly, quality. itutional a viaiiy rw the draws availability ta ntage point. As SIZE is is SIZE As point. ntage on the CA balance in in balance CA the on avings glut hypothesis. hypothesis. glut avings sgiiat s well. as significant s s f institutional of ls as a proxy of the the of proxy a as ignificant nt. nt. CEU eTD Collection balance. At low 10 percentile values of KAOPEN, POLITY and GOVB and POLITY KAOPEN, of values percentile 10 low At balance. ecn o te aine n h CGP Mdl wt pois f t of proxies with Models CAGDP. the in variance the of percent As none of the interaction terms was significant, I significant, was terms interaction the of none As country with the largest public bond market. To con To market. bond public largest the with country the CA balance by 0.793 percentage points. the balance CA percentage 0.793 by points. incre point percentage 1 a markets, bond public large and openness countr In results. interesting more yields POLITY of effect The However, balance. CA the on effect negative a has PBBM USA), and openness capital of level high quality, institutional high with positive, is values percentile 10 high at PBBM of effect the percentage 0.287 by balance CA the decreases PBBM in increase institutional the with interaction its by mitigated is effect B.20). 2005 of period the for balance CA German underestimates it although Japane and U.S. the of behavior the predicts model SIZE that suggest 95% approximate an provide which banks, error standard two with accounts each by predicted accounts current the at look to interest of also W follow. sector financial the of size overall the and development othe outperforms development financial the of proxy the as PBBM reduced the mean VIF to 1.765. The largest VIF was VIF largest The 1.765. to VIF mean the reduced SI and POLITY2 of term interaction the for reported 110 dummy This Japan. for with dummy model the OLSPBBM U.S. current account deficit. account current U.S. empha been has instruments financial safe generate to ability 109 coefficient was reduced from -0.064 to -0.036 and i and -0.036 to -0.064 from reduced was coefficient em dd o sgiiaty hne antd o the or magnitude change significantly not did terms ee a oe ut e ae bu te multicollinear the about made be must note a Here, o reaches PBBM U.S. the that noted be must it Here 110 Which of the models is the best? If looking at the adjusted R-squar adjusted the at looking If best? the is models the of Which h frhr rx o itrs i te ie f h pbi bn ma bond public the of size the is interest of proxy further The

109

The effect of PBBM on the CA balance is positive but this but positive is balance CA the on PBBM of effect The re-estimated the regression without interaction te interaction without regression the re-estimated ZE (13.297), see Appendix B.17. The mean VIF was 4. was VIF mean The B.17. Appendix see (13.297), ZE ts significance increased from p-value of 3.47% to to 3.47% of p-value from increased significance ts 213 trol for the possible outlier effect, I estimated t estimated I effect, outlier possible the for trol reported for relative income (3.188). Dropping inte Dropping (3.188). income relative for reported sign of coefficients with a single exception. The The exception. single a with coefficients of sign nly average values compared to, for example, Japan, example, for to, compared values average nly t polm Te ags VF n IE ersin was regression SIZE in VIF largest The problem. ity

was insignificant. was insignificant. quality and the government budget government the and quality albeit insignificant. In countries In insignificant. albeit sized as the main reason of the of reason main the as sized ies with high level of capital of level high with ies high budget deficits (such as (such deficits budget high model. The implied current implied The model. hen comparing models, it is is it models, comparing hen ase in POLITY2 decreases POLITY2 in ase points. On the other hand, hand, other the On points. this effect is insignificant. insignificant. is effect this se CA balance the best, the balance CA se s a i epan 75.8 explains it as rs, kt PB) a the as (PBBM), rket AL, a 1-percentage a AL, he banking sector sector banking he -07 (see Appendix Appendix (see -07 ed, the model with model the ed, forecast intervals forecast he pooled pooled he rms. This This rms. 0.62%. raction raction SIZE SIZE 479. the

CEU eTD Collection base results discussed above. In case of the developed countries, countries, developed the of case In above. discussed results base because dropping significant interaction terms woul terms interaction significant dropping because larg the reduced development financial the of proxy results. results. Afr excluding countries, developing for results the res The B.21-23. Appendices in listed are countries 111 it retain not did ratio dependency the Furthermore, antd, in r infcne f h coefficients Th the of 2.310. significance to or 3.788 sign from magnitude, VIF mean the and M3GDP) and M3GDP and KAOPEN is 18.2%). see B.24.a. andM3GDP For Appendix KAOPEN details, is more t of p-value the case, latter the (in M3GDP and SMTV with models signifi are KAOPEN and POLITY2 with development financial the other the On insignificant. is GOVBAL of effect the Otherwise, r it Although develop financial the balance. when regression single a in only significant budget government the of effect the in is respectively. Africa excluding countries developing f (6.1) equation of estimation the list 6.10 and 6.9 Tables development. of count for model the re-estimate I Therefore, countries. developing themarkets largest with the balance and CA countries financial in increases i balance CA the decreases openness capital the in increase SIZ hypothes glut savings global on the of predictions the contradicts conditional KAOPEN of effect the However, hypothesis. glut line in are findings These negative. remains KAOPEN and POLITY2 Similarly, dropping the insignificant interaction t interaction insignificant the dropping Similarly, The results for developing countries, all countrie all countries, developing for results The Ito and Chinn (2007) documented different determinants of the CA for deve for CA the of determinants different documented (2007) Chinn and Ito ee hwvr tee r svrl hne. is, h effect the First, changes. several are there however, Here, erms from the current account regression using M3GD using regression account current the from erms ica. Neither did exclusion of Africa significantly significantly Africa of exclusion did Neither ica. d lead to the loss of information. information. theofloss to lead d ults for developing countries do not significantly significantly not do countries developing for ults s significance: the p-value increased from 4.6% to to 4.6% from increased p-value the significance: s est VIF from 12.036 to 5.282 (interaction term of K of term (interaction 5.282 to 12.036 from VIF est s excluding Africa and all countries excluding oil- excluding countries all and Africa excluding s Hwvr i i nt osbe o e mr sensitivi more see to possible not is it However, . 214

is did not lead to any significant changes in the the in changes significant any to lead not did is 111 This alters the results in regard to the to regard in results the alters This n countries with smallest financial financial smallest with countries n is. For developed countries, an an countries, developed For is. hand, the interaction terms of of terms interaction the hand, ment is proxied as CREDIT. as proxied is ment the most interesting change interesting most the ries grouped by their stage stage their by grouped ries cant in all cases, except of of except cases, all in cant f IE odtoa on conditional SIZE of with the global savings savings global the with mis oiie i is it positive, emains e neato tr of term interaction he markets markets or developed, and and developed, or E and POLITY2 POLITY2 and E alter the base base the alter loped and loped differ from from differ exporting exporting 13.26%. 13.26%. AOPEN AOPEN P as the the as P ty tests tests ty

CEU eTD Collection

Table 6.9: Current account regressions (developed countries) FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE country FE country FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways -29.033 9.609 4.105 -32.880 -42.759 -22.233 2.819 52.319 -256.035 C (21.637, 0.184) (21.544, 0.658) (23.321, 0.861) (19.040, 0.088) (25.671, 0.104) (30.863, 0.475) (29.256, 0.924) (37.119, 0.168) (65.650, 0.000) -0.016 -0.071 -0.102 -0.002 -0.129 -0.136 -0.142 -0.114 -0.121 RELYOECD (0.047, 0.734) (0.051, 0.172) (0.049, 0.043) (0.035, 0.945) (0.076, 0.101) (0.053, 0.014) (0.061, 0.025) (0.049, 0.027) (0.055, 0.035) 0.945 2.161 1.639 2.050 4.960 3.728 1.328 -5.110 27.851 POLITY2 (0.897, 0.295) (0.604, 0.001) (0.657, 0.016) (1.247, 0.104) (1.280, 0.000) (1.478, 0.015) (1.095, 0.232) (3.783, 0.186) (6.122, 0.000) 0.110 -0.065 0.029 0.221 -0.834 0.030 0.093 -42.816 54.120 FD (0.104, 0.296) (0.131, 0.624) (0.318, 0.928) (0.111, 0.050) (0.352, 0.023) (0.181, 0.869) (0.227, 0.684) (22.913, 0.070) (15.118, 0.001) -1.783 -18.357 -14.555 -4.493 19.472 -28.031 -9.417 -13.769 15.978 KAOPEN (7.408, 0.810) (4.778, 0.000) (6.805, 0.038) (7.382, 0.545) (12.399, 0.125) (14.059, 0.053) (8.756, 0.288) (10.150, 0.184) (10.237, 0.128) 0.156 0.273 0.073 0.298 0.359 -0.051 0.081 0.225 0.148 GOVBAL (0.192, 0.417) (0.231, 0.243) (0.201, 0.718) (0.137, 0.033) (0.529, 0.502) (0.235, 0.828) (0.236, 0.733) (0.240, 0.355) (0.299, 0.623) -0.005 -0.009 0.004 -0.005 -0.027 -0.021 -0.010 -0.016 -0.030 NFAIN (0.027, 0.866) (0.029, 0.747) (0.028, 0.896) (0.023, 0.828) (0.017, 0.121) (0.017, 0.222) (0.022, 0.659) (0.016, 0.311) (0.022, 0.197) 0.176 -0.474 -0.270 0.165 -0.073 -0.343 -0.360 -0.286 -0.386 DEPR (0.185, 0.344) (0.251, 0.066) (0.298, 0.370) (0.163, 0.317) (0.309, 0.816) (0.289, 0.243) (0.329, 0.281) (0.293, 0.337) (0.284, 0.183) -0.008 -0.003 -0.012 -0.025 0.073 -0.012 -0.012 4.761 -5.439 POLITY2*FD (0.011, 0.445) (0.012, 0.793) (0.029, 0.680) (0.014, 0.074) (0.033, 0.034) (0.020, 0.549) (0.023, 0.618) (2.213, 0.039) (1.543, 0.001) 0.277 1.491 1.236 0.429 -2.347 2.516 0.852 1.754 -1.970 POLITY2*KAOPEN (0.754, 0.714) (0.457, 0.002) (0.704, 0.086) (0.723, 0.554) (1.332, 0.086) (1.355, 0.070) (0.856, 0.325) (0.932, 0.068) (1.041, 0.067) -0.018 0.029 0.044 -0.005 0.037 0.039 0.014 -1.681 0.312 KAOPEN*FD (0.013, 0.182) (0.010, 0.005) (0.018, 0.016) (0.017, 0.792) (0.027, 0.181) (0.014, 0.006) (0.014, 0.309) (0.641, 0.013) (0.589, 0.599) 0.158 0.172 0.077 0.131 0.245 0.278 0.212 0.188 0.227 TRADEGDP (0.054, 0.005) (0.058, 0.005) (0.068, 0.264) (0.048, 0.009) (0.063, 0.000) (0.073, 0.000) (0.081, 0.012) (0.067, 0.008) (0.061, 0.001) -0.021 0.211 0.406 -0.220 0.500 0.551 0.180 0.381 0.423 ECONGROWTH (0.417, 0.961) (0.427, 0.623) (0.445, 0.366) (0.354, 0.536) (0.585, 0.399) (0.370, 0.144) (0.525, 0.733) (0.413, 0.363) (0.500, 0.404) -0.005 PBBM*GOVBAL (0.006, 0.427) R-squared 0.789 0.907 0.875 0.819 0.936 0.917 0.896 0.952 0.939 Adj. R-squared 0.667 0.829 0.780 0.719 0.871 0.837 0.798 0.898 0.871 Durbin-Watson stat 1.374 2.000 1.763 1.384 1.976 2.208 1.726 2.735 2.674 Countries 25 25 25 25 22 25 25 24 24 Observations 118 80 84 122 75 85 85 73 73 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1980 - 2007 1990 - 2007 1990 – 2007 Notes: see table 6.1.

215 CEU eTD Collection oiy esetv, uh idn i irlvn fr h Uie S United the for irrelevant is finding such perspective, policy banking sector development have opposite effects on the CA bala CA the on effects opposite have development bankingsector suggest that in the medium-run the government balance is more impor more is balance government the medium-run the in that suggest points. percentage 0.581 to 0.405 by balance CA the increase GOVBAL 1-p a positive: significantly is GOVBAL the of effect The 0.408. t 0.169 of effect positive the from ranges which capita, per income the on evidence mixed a is There 6.10. Table see Africa), (excluding h efc o PLT2 wih s oiie t l lvl o PB of levels all at positive is which POLITY2, of effect the ther However, POLITY2. of levels high with countries for negative is POLITY2 and PBBM on conditional KAOPEN of effect The GOVBAL. levels low with countries for balance CA the on effect negative is not possible to increase to possible not is the qua balance CA improvingby the institutional deve the of most to similarly highest, the is quality institutional market stock the countries, developed for that suggests This MARGIN. be can conclusions Similar hypothesis. glut savings global the ef an balance, CA the on effect opposite the has CREDIT hand, other dec openness capital the in increase an quality institutional of proxie as ma developed financially SMTO most the with countries in and development: STOCK using regressions in th also of hypothesis predictions the to contrary is KAOPEN of effect The B.25). pe the for States United the of deficit balance CA the account overestimates current run to tend openness capital of levels high f developed most the with countries that assumes which hypothesis, the contradict findings These institutions. quality high by supported eut ae lee as fr h mdl r-siae fr th for re-estimated models the for also altered are Results 216

riod of 2005-07 (see Appendix Appendix (see 2005-07 of riod reases the CA balance. On the the On balance. CA the reases M n KOE. rm the From KAOPEN. and BM made about OVERHEAD and OVERHEAD about made loped countries. Therefore, it Therefore, countries. loped of KAOPEN, POLITY2 and POLITY2 KAOPEN, of nce. PBBM has a significant significant a has PBBM nce. tates, whose score on the the on score whose tates, ercentage point increase in in increase point ercentage rkets and the highest level highest the and rkets e is a significant change in in change significant a is e inancial markets and with and markets inancial o the negative effect of – of effect negative the o e developing countries countries developing e fect that is in line with line in is that fect s. Indeed, this model model this Indeed, s. tant in influencing the influencing in tant goa svns glut savings global e fet f h relative the of effect development and the and development lbl aig glut savings global o te financial the of s These results also results These lity. lity. as expected: expected: as CEU eTD Collection eair f h C blne n eeoig onre. h ti deficit twin The countries. developing in balance CA the of behavior well. Japanes Chinese, the of prediction best the provides model PBBM B.25). implie (see development CA the C capture best to seem and models PBBM States, United the of case In respectively). 0.871 and 0.898 (0.871, adj highest the have models OVERHEAD and MARGIN PBBM, Africa),

openness, such as China. ma bond public small with countries in balance CA the increase instituti the in increase an that suggests which KAOPEN, and PBBM effe the is balance CA the on development financial of effect t about conclusion (2007) Chinn’s and Ito of supportive result only The above). sa the in difference the from deve stem may in results balance in difference CA the in increase an induces markets financial incre where (2007), Chinn and Ito of findings the to contrast in is result surplus CA the reduce would market financial the of size the sugg results the Thus, B.24.b). Appendix (see hypothesis glut savings with line in is MARGIN, of as well as KAOPEN, and POLITY2 on S of effect The world. developed the than better world developing

When looking at models estimated for developed and developing countries countries developing and developed for estimated models at looking When 217

d current accounts in Appendix in accounts current d ct of POLITY2 conditional on on conditional POLITY2 of ct in developing countries. This This countries. developing in mple size and time span (see (see span time and size mple rkets and low level of capital of level low and rkets IZE and PBBM conditional conditional PBBM and IZE predictions of the global the of predictions loping countries. The The countries. loping est that an increase in in increase an that est hptei tu fits thus hypothesis s e and German CA as CA German and e onal quality would would quality onal s i te ie of size the in ase se R-squared usted he positive he (excluding REDIT CEU eTD Collection

Table 6.10: CA Regressions, developing countries excluding Africa FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE twoways FE twoways FE twoways FE country FE twoways FE twoways RE country FE country -2.683 4.624 2.916 -3.581 13.430 8.218 4.058 16.838 15.227 C (9.940, 0.788) (9.985, 0.645) (8.916, 0.745) (10.502, 0.734) (12.732, 0.302) (15.031, 0.587) (14.216, 0.776) (3.320, 0.000) (11.953, 0.208) 0.142 -0.123 -0.155 0.169 -0.408 -0.228 -0.126 -0.214 -0.253 RELYOECD (0.068, 0.038) (0.180, 0.498) (0.165, 0.350) (0.082, 0.040) (0.168, 0.023) (0.125, 0.075) (0.103, 0.227) (0.066, 0.002) (0.154, 0.105) -0.012 -0.463 -0.197 -0.103 0.604 -0.103 -0.068 -0.434 0.163 POLITY2 (0.262, 0.963) (0.248, 0.069) (0.199, 0.327) (0.261, 0.694) (0.177, 0.002) (0.227, 0.652) (0.183, 0.709) (0.132, 0.001) (0.366, 0.657) -0.047 -0.059 -0.056 -0.061 0.089 -0.004 0.006 -0.830 1.187 FD (0.038, 0.224) (0.036, 0.109) (0.056, 0.316) (0.053, 0.257) (0.089, 0.330) (0.018, 0.807) (0.042, 0.891) (0.245, 0.001) (0.681, 0.087) -0.018 0.227 0.026 -0.261 1.463 -0.580 0.638 0.038 -0.489 KAOPEN (0.948, 0.985) (1.272, 0.859) (1.190, 0.983) (0.937, 0.781) (0.997, 0.155) (1.288, 0.654) (1.126, 0.573) (0.759, 0.960) (1.676, 0.772) 0.181 0.513 0.405 0.235 0.184 0.130 0.117 0.581 0.325 GOVBAL (0.138, 0.190) (0.231, 0.031) (0.229, 0.082) (0.208, 0.260) (0.406, 0.655) (0.283, 0.648) (0.273, 0.670) (0.188, 0.003) (0.335, 0.336) 0.003 0.047 0.043 0.027 -0.058 0.068 0.031 0.058 0.044 NFAIN (0.002, 0.138) (0.029, 0.115) (0.033, 0.185) (0.035, 0.430) (0.043, 0.187) (0.037, 0.069) (0.030, 0.301) (0.011, 0.000) (0.047, 0.356) 0.051 0.020 -5.57E-05 0.100 -0.279 -0.019 -0.015 -0.063 -0.218 DEPR (0.137, 0.710) (0.141, 0.888) (0.128, 0.9997) (0.143, 0.488) (0.198, 0.172) (0.190, 0.922) (0.183, 0.934) (0.032, 0.051) (0.181, 0.236) -0.003 0.007 0.007 -0.001 -0.023 -0.001 0.001 0.077 -0.051 POLITY2*FD (0.006, 0.665) (0.003, 0.012) (0.006, 0.299) (0.008, 0.937) (0.009, 0.015) (0.002, 0.532) (0.006, 0.862) (0.027, 0.005) (0.086, 0.554) -0.118 -0.139 -0.104 -0.096 -0.091 0.068 0.026 0.036 0.129 POLITY2*KAOPEN (0.073, 0.108) (0.144, 0.341) (0.124, 0.404) (0.078, 0.217) (0.116, 0.443) (0.084, 0.421) (0.084, 0.754) (0.034, 0.288) (0.148, 0.387) -0.010 0.002 0.002 -0.007 -0.016 0.005 -0.027 -0.059 -0.143 KAOPEN*FD (0.013, 0.463) (0.010, 0.834) (0.018, 0.899) (0.017, 0.704) (0.039, 0.682) (0.013, 0.689) (0.017, 0.107) (0.127, 0.644) (0.281, 0.613) -0.017 0.047 0.051 -0.026 0.057 -0.005 0.008 -0.025 -0.030 TRADEGDP (0.033, 0.609) (0.039, 0.236) (0.037, 0.166) (0.035, 0.463) (0.035, 0.117) (0.049, 0.925) (0.055, 0.884) (0.015, 0.101) (0.070, 0.667) -0.136 -0.523 -0.388 -0.290 -0.268 -0.454 -0.546 -0.790 -0.283 ECONGROWTH (0.193, 0.483) (0.299, 0.086) (0.309, 0.214) (0.265, 0.278) (0.217, 0.229) (0.326, 0.169) (0.275, 0.052) (0.200, 0.000) (0.391, 0.472) -0.009 PBBM*GOVBAL (0.013, 0.509) 5.155 OIL (1.141, 0.000) R-squared 0.854 0.894 0.870 0.834 0.907 0.842 0.843 0.553 0.846 Adjusted R-squared 0.768 0.767 0.726 0.729 0.784 0.671 0.681 0.499 0.668 Durbin-Watson stat 2.715 2.824 2.892 2.694 3.000 2.830 2.640 1.691 3.003 Sample 59 40 45 50 20 45 45 54 54 Observations 209 104 117 177 57 118 123 122 121 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1975 - 2007 1990 - 2007 1990 - 2007

218 CEU eTD Collection proxy of the FD. This is probably due to smaller positive positive smaller to due probably is This FD. the of proxy ugt aac, ugsig h iprac o icm sok. e for Net shocks. income of importance the suggesting balance, budget eair f h C blne s eemnd y ifrn fcos T factors. different by determined is balance CA the of behavior government budget balance, which was significant only in case whe case in only significant was which balance, budget government signific statistical their retain not did before significant coe the of Some 69. of maximum the to size sample the reduced This 10 than greater or –10 than lower was variable dependent the which is insignificant. insignificant.is Fina CAGDP. of values extreme the excluding after even unchanged POLI and KAOPEN with interactions its pr as the well as on development, coefficients the hand, other the On sample. base the in than supported by high-quality institutions. supported byinstitutions. high-quality with countries in balance CA the decreases openness capital tha predicts and (0.76) R-squared adjusted highest the has model PBBM PB and SIZE M3GDP, as proxied when unchanged remains development T short-run. the in balance CA the on effect positive significant gr economic real the by played is role important More averages. simila are results general, In B.27). Appendix (see rate exchange logarit lagged included also and model the reestimated I data, annual cross-se and data annual using regression panel the reestimated Tests 6.4.2 Robustness n re t eaie h rbsns o te eut t te hie of choice the to results the of robustness the examine to order In rs-eto rgesos se pedx .8 sget ht n h l the in that suggest B.28) Appendix (see regressions Cross-section To check if the baseline results are sensitive to outliers, I e I outliers, to sensitive are results baseline the if check To 219

ne Ti hls seily o the for especially holds This ance. effect of GOVBAL on SAVINGS on GOVBAL of effect largest public bond markets markets bond public largest xcluded all observations for for observations all xcluded ction averages. Using the the Using averages. ction wh n te government the and owth he effect of the financial financial the of effect he lly, the economic growth growth economic the lly, hms of the real effective effective real the of hms r to those using 5-year 5-year using those to r he fiscal balance has a a has balance fiscal he TY2 remained virtually virtually remained TY2 n PBBM was used as a a as used was PBBM n fficients that had been been had that fficients (see Appendix B.26). B.26). Appendix (see eign assets have a a have assets eign t an increase in the in increase an t aa rqec, I frequency, data xe o financial of oxies M Oc again, Once BM. ong-run, the the ong-run, CEU eTD Collection proxy of the institutional quality (see Appendix B.29). This variable This B.29). Appendix (see quality institutional the of proxy position of financial U.S. position instruments. y .7 t 618 ecnae ons Tee eut sget ht hr is there that suggest results These points. percentage 6.168 to 4.878 by iia t toe f eeoe cutis Scn, re-estimated significantly not did the results. exporting alter countries. This I Second, countries. developed of those to similar whi POLITY2, ma and SIZE The of term interaction results. the of the significance alter significantly not did countries African re-estimat I Therefore, countries. African of exclusion or inclusion the or economy world the in States United the of position specific phenome broader capture might factor unexplained this However, world. financial U.S. the of size larger significantly the for control was dummy USA the Originally, States. United the to unique factor decre a suggests and models 8 of out 4 in significant is dummy USA the percentage 6.933 to 3.068 by balance CA the increases exporter oil mode the Finally, deficit. CA the run and income future their against growi faster and poorer that hypothesis development of stages m between the models, medium-run and short- the to contrast In surplus). de CA run to tend markets financial developed and institutions quality sugge model the Nevertheless, balance. fiscal the with interaction is PBBM of effect negative the where model, PBBM is exception interaction the by mitigated is effect this but long-run the in ef this development financial the of effectThe PBBM. with interaction however, balance, CA the on effect positive significant Finally, I re-estimated the regression using XCONST (constraint XCONST using regression Ire-estimated the Finally, t ad hn (07 dcmn ta ter siain eut ae sensit are results estimation their that document (2007) Chinn and Ito 220

market relative to the rest of the of rest the to relative market ng economies tend to borrow to tend economies ng on the CA balance is positive positive is balance CA the on with POLITY2. The single single The POLITY2. with sts that countries with high- with countries that sts h ae te eut more results the makes ch ed the model. Exclusion of Exclusion model. the ed points. On the other hand, hand, other the On points. s is used as a proxy of the of proxy a as used is s h mdl ihu oil- without model the further magnified by its its by magnified further fect is mitigated by its its by mitigated is fect included in the model to to model the in included l suggests that being an being that suggests l perceived “safe haven” haven” “safe perceived o cag i i the in is change jor on the executive) as a as executive) onthe ase in the CA balance balance CA the in ase ficit (or smaller CA CA smaller (or ficit some unexplained unexplained some odel supports the supports odel a sc a the as such na, ive to the the to ive CEU eTD Collection proxy of the institutional quality. quality.proxy the institutional of develo financial the of proxy the as PBBM using regression base balance, albeit only in the short-run between 1865 and 1913. However, there were and also s balance, short-run 1913.However,albeit only there between 1865 the in by played was role important An persons. dependent of proportion were savings excess this decade, past the in world the of part ons n h ps-W eid Tee eut spot h Lassudrie- the support results These period. post-BW the in points .1 t 018 ecnae ons n h peWr eid n b 004 o .2 perc 0.121 to 0.084 by and period pre-War the in points percentage 0.128 to 0.115 capita per income relative the in increase point percentage 1 6.5. Conclusions and recommendations6.5. policy where regression, PBBM of except insignificant, is interactions effe the 1913, to 1865 of period the to Similarly expropriation. of risk to relatively rich countries with developed with relatively markets,to financial qualityrich high countries i (m produced been has and globalization of era first the during world comparis b produced were The savings excess the factors. although Thus, similarities. same the by driven was savings excess whet examine to was aim main The globalization. of eras two in differences, especially in the effect of the economic growth. growth. the effecteconomic differences,especially of the in BW period. BW period. w opposite the surplus, CA the run to tended economies faster-growing hand, Whereas other periods. examined two during different was growth the economic On hypothesis. development of stages the of version This chapter empirically tested the medium-term determinants medium-term the tested empirically chapter This In general, the effect of the relative income per capita wa capita per incomerelative the of effect the general, In 221

redistributed along similar lines similar along redistributed decreased the CA balance by by balance CA the decreased s negative for both periods. A periods. both fornegative s the results are similar to the to similar are results the y the developed part of the the of part developed the y pment and POLITY2 as the the as POLITY2 and pment e te eitiuin of redistribution the her on has yielded several several yielded has on ostly) by the developing developing the by ostly) the government budget budget government the of the current account account current the of Duchêne ct of XCONST and its its and XCONST of ct in the pre-War period period pre-War the in as true for the post- the for true as nstitutions and high nstitutions the effect of the the of effect the t al.et (1990) (1990) entage everal everal CEU eTD Collection ecnae f D. o te otBetnWos eid te financia the period, post-Bretton-Woods the For GDP. of percentage but this effect seems to be more important for developing countr developing for important more be to seems effect this but period the excess savings were transferred from old savers in the in savers old from transferred were savings excess the period the pre-War period. There, financial deepening was measured as measured was deepening financial There, period. pre-War the China and other East Asian countries to young world. and ofChina countries various other the in savers parts East to Asian t were savings excess the decade, past the in World, New the in the post-BW period, the government budget balance has a positive positive a has balance budget government the period, post-BW the predicte as positive, (se shocks income to short-run of the importance the hypothesis. suggests This is short-run the in effect its However, run. Chinn 2007). Chinn i were markets bond when significant were balances fiscal the more financially developed countries. countries.more financially developed developed financially less in rates investment the in increase quality the in improvement Similarly, institutions. high-quality opposite The rates. investment in increase an to led deepening i low-quality with countries In rates. investment the on effect t The balance. account current the reduced deepening financial the in impor an played development financial the that suggested results 0.384 by balance CA the reduced quality institutional the in increase In openness. capital and quality institutional the with interaction

itreeainl rnfr (alr n Wlimo 19) Tu, wher Thus, 1994). Williamson and (Taylor transfer” “intergenerational In the pre-War period, the government budget balance is insignif is balance budget government the period, pre-War the In Finally, this analysis focused also on the effect of the financial the of effect the on also focused analysis this Finally, Here, it must be noted that the comparison is complicated by t by complicated is comparison the that noted be must it Here, Dependency rates played some role in both periods, suggesting t suggesting periods, both in role some played rates Dependency 222

economies and to a decrease in in decrease a to and economies ncorporated (see also Ito and and Ito also (see ncorporated ransferred from old savers in in savers old from ransferred the pre-War period, a 1 point point 1 a period, pre-War the was true for countries with with countries for true was tant role as well: an increase increase an well: as role tant nstitutions, further financial financial further nstitutions, monetary aggregate M2 as a as M2 aggregate monetary Old World to young savers savers young to World Old ies. In developed countries, developed In ies. f ntttos e t an to led institutions of effect on the CA balance CA the on effect wo variables had a joint joint a had variables wo b te wn deficits twin the by d percentage points. The The points. percentage he data availability for for availability data he development and its and development icant in the medium- the in icant he importance of the the of importance he eas in the pre-War pre-War the in eas deeig was deepening l e Chapter 5). In 5). e Chapter CEU eTD Collection period would be different if measured as the stock or the bond marke bond the or stock the as measured if different be would period C the on development financial the of effect the that assume to aggre monetary as measured if development financial of levels per post-BW the in States United the and period pre-War the in interesting more yielded sector banking the of efficiency the or market,financial the of size the as such development, financial How GDP. of percentage a as M3 aggregate monetary as measured insights are provided by the analysis of the post-BW period. analysisinsights of are the post-BW the by provided Similar results wereSimilar efficiency when of examining obtained the the banki the is market financial its because world the of rest the from developing and Uni developed the that view common the or support results the Thus, countries separately. all at looking whether hold, results effe negative significant a has creation, credit private the and o gv mc spot o h cam ht h cptl con liber account countries surpluses. might CA reduce their capital the that claim the to support much give not devel for insignificant is openness capital the of effect The r to tend therefore and abroad from capital the absorb openness countri developed financially more the that i claims the to contrast high-quality the and markets financial largest the with countries increases openness capital the in increase An hypothesis. holds better for the developing countries in the post-Bretton-Woods p post-Bretton-Woods the in countries developing the for better holds tw the whereas But 2007). Chinn and Ito also (see exclusive mutually Size of the financial market, measured as the sum of the stock m stock the of sum the as measured market, financial the of Size The effect of the capital openness provides mixed evidence to t to evidence mixed provides openness capital the of effect The These results suggest that the global savings glut and twin defic twin and glut savings global the that suggest results These 223

the current account in developed developed in account current the oping countries. These results do results These countries. oping gate M2 or M3, it is reasonable is it M3, or M2 gate size of the public bond market bond public the of size eps ad h ms liquid. most the and deepest un the current account deficit. deficit. account current the un ct on the CA balance. These These balance. CA the on ct results. As both Great Britain Britain Great both As results. es with high level of capital capital of level high with es blne n h pre-War the in balance A iod reached only average average only reached iod ever, other proxies of the of proxies other ever, ted States attracts capital capital attracts States ted lzto i developing in alization siuin. hs s in is This nstitutions. he global savings glut glut savings global he eriod and only in the in only and eriod in deficits hypothesis hypothesis deficits in t development. Some Some development. t its hypothesis are not not are hypothesis its ng sector. ng sector. arket capitalization capitalization arket countries CEU eTD Collection C economy, in the as world United in discussed the States specific of the position othe to relative market financial U.S. the efficiencyof or size factor This points. percentage 6.168 to 4.878 by balance account current the being States: United the to related factor unexplained some suggestregression Finally, the long-run child policy. the abandonment the one of surpl account current Chinese the in reduction the that suggests ratio ba account current the between relationship negative The loosening. a be could deficit account current the in reduction short-to-medium-run fina their of development the at aimed policies on focus rather of levels low with countries surplus the imbalances, global account current Chinese the reduce to help not would China in controls the results, these on t Based on countries. openness developing for capital insignificant the of effect the hand, other the On study. p second the in countries developing and developed both for and study under hypot glut savings global the period, pre-War the for short-run

224

r national financial markets or to to or marketsfinancial national r financial development should should development financial ncial markets. Similarly, the the Similarly, markets. ncial hesis holds for both periods both for holds hesis United States decreases the decreases States United lance and the dependency dependency the and lance us might be triggered by by triggered be might us imnln o capital of dismantling e urn acut is account current he chieved through fiscal fiscal through chieved deficit. To unwind the the unwind To deficit. may be related to the to related be may s that there is is there that s hapter 4. eriod under under eriod CEU eTD Collection budget balance, the latter between the current account balance account current the between latter the balance, budget

deficits in the New World countries. countries.deficits the in New World mat were powers continental other and Britain cu Great of The surpluses 1913. and 1873 between GDP of percent 5 abroad invested Britain counterp financial a As GDP. of percent 4.5 of surplus account current Brita I, War World the of outbreak the to 1870 from roughly spanned which In imbalances. global of episodes past the to them comparing f imbalances global these explored dissertation This countries. East especially economies, emerging in surpluses account current United the economy, largest world’s the of deficit account current are period. the current to specific al behavior account current the explain to able are hypotheses ai main The globalization. of eras two in imbalances global approac History Economic Comparative New the adopted I debates, Mot hand. other the on openness capital and development financial the of the between link a draws first The hypothesis. glut savings the views: two contrast usually imbalances global the surrounding per and emergence their of question the around swirl that debates eemnn te rd blne Scn, ue te ae dt anal data panel the used I Second, balance. or trade the determining permanent of dominance relative the analyze to autoregression The past decade saw an unprecedented reversal in the curre the in reversal unprecedented an saw decade past The hs israin uvyd h ln hsoy f h goa imbala global the of history long the surveyed dissertation This o hs n, uiie to ehdlge. is, ue te structural the used I First, methodologies. two utilized I end, this To CONCLUSION 225

current account balance and the and balance account current ws o e wehr h two the whether see to was m rom the historical perspective, historical the rom so in the past or whether they they whether or past the in so on the one hand and the level the and hand one the on h is eao globalization, of era first the sistence. The current debates debates current The sistence. States, was mirrored by the the by mirrored was States, twin deficits and the global global the and deficits twin ss o xmn te main the examine to ysis nt account financing. The The financing. account nt Asian and oil-exporting oil-exporting and Asian ched by current account account current by ched h and compared the the compared and h transitory shocks in in shocks transitory cs o nom the inform to nces art of this surplus, surplus, this of art in ran an average average an ran in ivated by these these by ivated rrent account account rrent vector CEU eTD Collection period. The government budget balance has a positive effect on the c the on effect positive a has budgetbalance government The period. aac. h rsls ile mn smlrte ad e diffe few and similarities many yielded results The balance. of determinants used commonly other for controlling while hypothesis, defic twin the of importance relative the tested analysis The focus main the with balances, account current the of determinants currentaccount balance. 1998), Miljkovic 1998), Miljkovic (2003), Kano (2001), Hoffman by documented as globalization, of era second wi line in are findings These income. the in changes the perm determine the whereas balance, trade the in variation of source main transitory the that suggest results The I. War World the before – It Germany, Britain, Great France, Denmark, – countries European results are not uniform across the two periods under study. results the areacross two periods study. under uniform not t of persistence the about hints provide that factors structural foc main The analysis. data panel a using balance account current the examines and approach different a adopts 6 Chapter shocks, income hr-u, ugsig h iprac o te rnioy hcs o income to shocks transitory the of importance the suggesting short-run, bala budget government the period, prewar Inthe instances. some oeg ast icess h cret con blne Ti hls e holds This balance. account current the increases assets foreign hi the hand, other the On periods. both in surpluses) lower (or deficits r to tend persons dependent of proportion high and institutions quality high First, Chapter 5 examined the major sources of changes in the trade the in changes of sources major the examined 5 Chapter First, As the results of Chapter 5 do not differentiate between various between differentiate not do 5 Chapter of results the As h rsls ugs ta rltvl rc cutis ih developed with countries rich relatively that suggest results The et al. (2000)Horvath and Veselkova and (2008). 226

he global imbalances. Here, the the Here, imbalances. global he t ad h goa svns glut savings global the and its ecs n h bhvo o the of behavior the in rences nce is significant only in the the in only significant is nce us is on the medium-run or medium-run the on is us on the medium-run factors. medium-run the on shocks to income are the are income to shocks aly, Norway, and Sweden Sweden and Norway, aly, urrent account balance in in balance account urrent nn sok t income to shocks anent pcal i te prewar the in specially th the findings for the the for findings the th gh initial level of net of level initial gh sources of transitory transitory of sources the current account account current the determinants of the of determinants un current account account current un financial markets, markets, financial balance of seven seven of balance documented in in documented i (1996, Kim CEU eTD Collection oiis ht ol ehne hi fnnil eeomn. n case In development. financial their enhance would that policies eras both in factors similar by determined were balances betterglobalization. However, holds for it developing countries. important more a plays hypothesis deficits twin The 5. Chapter reduce the large current account surpluses in the region. Rather, Rather, region. the in surpluses account current large the reduce l account capital that argument oft-claimed the against argue above the on Based recommendations. policy the conclusion, second the to us capital openness of and degree high markets countries financial large with its countries developed in whereas medium-run, the in balance account i role any play to seem not does openness capital the countries, g savings global the of predictions the to contrast in is openness importers capital be to tend markets financial developed more l the t support results and These period. pre-War the for balance also development account current the between relationship negative resul the Furthermore, market. financial the of efficiency or measur whether countries, developing and developed both for universal the of effect the hand, other the On countries. developing for only see hypothesis deficits twin the however, medium-run, the In 2007). Chinn and not are hypothesis deficits twin the and glut savings global the United States. This factor may either be related to the to related be either may factor This States. United the some is there that suggest regressions long-run the Finally, well. current Chinese the reduce might policy one-child the in Changes run. b in effect similar the have would policy fiscal Expansionary ba further or market stock the through privatization the include might Based on the above, it is possible to make two conclusions. Firs conclusions. two make to possible is it above, the on Based 227

f h goaiain Scn, the Second, globalization. the of size of the U.S. financial market market financial U.S. the of size ts provide some evidence for the the for evidence some provide ts iberalization in East Asia would would Asia East in iberalization mutually exclusive (see also Ito also (see exclusive mutually oth the short- and the medium- the and short- the oth . However, the effect of capital capital of effect the However, . these countries should opt for for opt should countries these role in the second era of the of era second the in role lut hypothesis. In developing In hypothesis. lut unexplained factor related to to related factor unexplained he view that countries with with countries that view he dtriig h current the determining n of China, these policies policies these China, of financial development is is development financial nking sector reforms. reforms. sector nking t, the current account account current the t, effect is positive for positive is effect ed as the overall size overall the as ed . These results bring . These account surplus as as surplus account evel of financial financial of evel it is possible to possible is it s o hold to ms CEU eTD Collection currencyUnited or States its economy. the international in sp the to related phenomenon broad the to or countries other to relative

228

ecific position of the of position ecific CEU eTD Collection 411) (1999, Stone Source: AsianRuss and European Includes 2. State. Free Natal, Hope, Good of Cape Africa, South Includes 1. exports, capital British A.1: 1865-1914 of ranked, Major recipients A: APPENDIX 1. CHAPTER TO Rank Rank 25 Greece 0,5 19300 19300 24493 26314 30678 33912 37173 0,5 41427 0,6 0,6 Greece 0,8 Germany 0,8 Cuba 25 46232 0,9 Uruguay 24 Spain 57920 23 61818 1 22 Peru 66193 21 73747 78285 Italy 20 1,1 Turkey19 81532 1,4 Rhodesia 1,5 18 17 1,6 France 16 1,8 Chile 1,9 Egypt 15 China 14 2 Japan 13 12 Mexico 11 10 7 Brazil 4,2 172742 172742 317174 339001 4,2 349243 412283 Russia 836371 Brazil 9 7,8 8 8,3 7 India 8,6 6 10,1 Australia 20,5 Argentina 5 Canada 4 U.S.A. 3 2 1 17 81,7 73,4 55,3 01 90,1 86,8 Total capital Total Country or or Country Hungary Hungary Austria- Zealand Zealand Africa colony colony called called South South New 1 2 2 3 3

Percentage Percentage of total total of capital capital called called 100 4079254 4079254 100 6,4 232233 232233 6,4 2,1 84495 84495 2,1 3,4 139348 139348 3,4 1 39954 39954 1 1 42268 42268 1 Cumulative Cumulative percentage percentage ia. 3. Includes European and Asian Turkey. AsianTurkey. and European Includes 3. ia. Orange River Colony, Transvaal and Orange Orange and Transvaal RiverColony, Orange 229

Amount Amount (₤ 000) 000) (₤ CEU eTD Collection

A.2: Industrial composition of British capital exports to the ten major recipients, 1865-1914 (percentage of capital called in each country)

All Broad industrial United South New countries Canada Argentina Australia India Brazil Russia Mexico group States Africa 1 Zealand & colonies Government 5,8 33,9 22,4 65,8 45,8 50,9 45,9 50,3 64,3 19,7 36,3 Railways 61,6 40,3 57,5 0 40,5 1,9 31,6 24,8 2 36,6 31,7 Public Utilities 9,5 5,6 8,9 3,5 3,1 2,4 10,2 3 5,1 12,1 6,4 Financial 6,3 6,2 5,4 11,6 1,5 6,4 2,1 5,9 17,8 9 7,3 Raw Materials 5,5 3,7 0,5 13,4 5,9 33,7 2,9 12 6,4 15,5 10 Mines 4,6 3,5 0,5 12,9 3,2 33,5 1,3 3,9 6,1 8,9 7,6 Industrial & Misc. 10,8 10,1 4,6 3,5 2 4,1 6,5 3,9 2,7 5,8 7,2 mfg. 5,7 3,1 1,5 0,6 0,7 0,6 1,3 2,3 0,6 2,2 2,9 Shipping 0,5 0,2 0,8 1,2 1,1 0,4 0,9 0,2 1,6 1,2 1,3 Total Private 3 94,2 66,1 77,6 34,2 54,2 49,1 54,1 49,7 35,7 80,3 63,7 Grand Total 4 100 100 100 100 100 100 100 100 100 100 100

(1) Includes South Africa, Cape of Good Hope, Natal, Orange River Colony, Transvaal, and Orange Free State. (2) Includes European and Asian Russia. (3) All broad industrial groups with exception of Government. (4) Details may not add to totals due to rounding. Source: Stone (1999, 412)

230 CEU eTD Collection

A. 3: Major recipients of British overseas investment – Total investment (capital called in ₤ 000)

1865- 1865-69 1870-74 1875-79 1880-84 1885-89 1890-94 1895-99 1900-04 1905-09 1910-14 1914 India U.S.A. Australia U.S.A. Argentina U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. 1 32107 83774 23385 78412 75489 77653 60139 84362 211283 211283 836371 Russia France U.S.A. Australia U.S.A. Australia India Transvaal Argentina Canada Canada 2 15828 32704 22244 49664 72058 43657 53524 51962 79612 191577 412283 Egypt Russia India India Australia Canada Australia Argentina Canada Argentina Argentina 3 12677 31177 18667 25023 66601 26435 48275 25788 76928 89093 349243 U.S.A. Peru Canada Argentina India Argentina Transvaal India India Brazil Australia 4 11156 22052 15462 19275 40539 25850 34385 23658 46550 66814 339001 New Australia Canada Italy Canada India China Australia Japan Australia India 5 Zealand 8220 18034 18819 34204 23039 20232 21294 40557 46222 317174 13559 Share of the 5 leading recipients

59% 54% 59% 62% 64% 67% 56% 58% 58% 61% 55%

Total investment

136267 344521 158190 307576 451674 295281 386561 359601 653155 986428 4079254

Source: Stone (1999, 393)

231 CEU eTD Collection provided by Jeffrey Williamson. provided Jeffreyby Williamson. by Jeffrey Williamson. by Williamson. Jeffrey by Niall Ferguson and Moritz Schularick. Source: FergusonFergusonandby(2006).and Schularick Moritz Niall Terms of volatility trade SPREAD the total population. Data come from Clemens and Williamson (2004) Data and population. the total were come Williamson from and Clemens kindly dependencyYouth children as measures the aproportion of aged below fra the 14or Spain: imports and exports imports Bordo comeSpain: and GDP from from nominal (2008) Mitchell and GDP come nominal exports from (2008). Mitchell Italy, GermanyUnited Kingdom,Norway, data Denmark: for France, and Sweden, i (asTrade a exports measured plus of percentage as is imports openness (2008) and wereachWilliamson come 5-yearData average. from respective wasTerms calculated of as volatility deviation trade the of standard the ter growthReal economic (ECONGROWTH) Data by Taylor provided were Source: 2002. kindly Alan Taylor. M. GDP in national currency fromGDP in exchange Bordo comes rate and in and exports onimports Banks (1976),Australia USD comes data and nomina from Japan: (2001). (2008), exchange rate from Bordo(2008),rate exchange from USD comes in and from GDP fromCanada: exports nominal Banks, Mitc data on imports Government expenditure to GDPto Government expenditure (1997). and Jones national Obstfeld currencyexchange from rate and USD comes in GDP in data and from exports Russia: onimports Banks(1976), nominal Trade (TRADEGDP) openness yieldskindl of consols. ThewereSpread over bond data measures the the spread Current savings and account, of (as investment GDP) a share B.1: Data sources, 1865-1913 B: APPENDIX CHAPTER TO 6. Relative income (RELYincome) Williamson. (2004) by and were and kindly Jeffre Data Williamson from provided Clemens come in current prices from Mitchell (2008). current (2008). in from prices Mitchell government revenueKingdom,expenditure, central central government Germany: Denmark,Australia,Italy,France, United States Norway, Sweden, Japan, and Germany. GDP the GDP average to per of Real capita GDP ofper real relative capita Youth dependencyYouth ratio (2008). analysis. Williamson Source:

per capita

, 1990 USD dollars. Logged, 1990USD dollars. GDP

et al. (2001). (2001).

232

et al. per capita Great Britain, France Great (2001). (2001). GDP). GDP). , Canada, United, ms of tradems for used the in e kindly eprovided kindly y provided and GNP

mports, mports, ction ofction y et al.

hell hell

l l CEU eTD Collection price index in Paul R. Gregory,Income, R. Paul in price National 3.1. 1885-1913, Russian Table index Norway: Norway: United Kingdom: United Kingdom: (2008). Mitchell GNP in and (Series Gold X 410-443). of dollars. Annual averages) 1970.(in billions 1867to X: MoneyGold: Chapter in Supply Cash, and MoneyWashington; Series Stock-Currency,Deposits, Bank X. Vault 410-419. to colonial times States, DepartmentBureau1970, U.S. Census, Commerce, of of the of United from States Historical in t M2 Bureau statistics (1975) of the Census USA: (2008). Mitchell in commercial (banknote in M2 deposits circulation, banks, in savings banks deposit Sweden Mitchell (2008).(K andproductMitchell 1913 prices the in Net Moscow-Petersburg national commercial (banknote in M2 deposits circulation, banks, in savings banks deposit Russia for Norway 1830-1865. TablecomesTable Klovland(2004), GDP (2004), in fromM2 4: A1, Grytten p.2o8-9; GNP (2008). Mitchell table GNP in in 23; deposits table in circulation table coins in 5; debanknotes in circulationM2 Mattia (1967), in in Italy: (2008). Mitchell in giro Tilly assetsgold) and (coins,M2 bank treasury notes,banknotes, in Reich’s Germany: Mitchell GDP in nominal (2008). (banknote commercialbanksM2 in savings andba deposits in deposits circulation, Denmark: Urquhart (2008); GNP in Mitchell deposits) nominal in (1963). commercial in –1868-1914M2 circulation, (currencybanks, savings banks deposits in Canada: (2008), Butlin Mitchell (1961).deposits) GDP in in nominal 1861-1913M2 circulation, commercial (currency in in deposits banks, savings banks Australia: Money GDP to (M2) supply (1997).Obstfeld and Jones (2008), Mitchell government GDP from nominal Russia: expenditure and revenue from GDP from Bordo (2008), andgovernment revenueSpain nomi Argentina:from expenditure and Mitchell et al. (2001). (2001).

233

he United (1973), NNP (1973), NNP s) and GDP s) in nks) and nks) okna) 14; 14; nal CEU eTD Collection pre-War come (1985). the data from period, Goldsmith Netassets foreign (NFA)

The NFA is measured as net foreign assets in the initial year net the foreign initial in The measured ofas is NFA the assets fiv 1800-2004. Characteristics and Transitions, IV (7). Parity Politi Executive Source: or POLITY Project. Subordination or collectives.individuals A seven-categoryranges Unlimite from scale constrainsof onthe decision-making institutionalized of executive powers chief (DecisionXCONST refers Constraints Executive variable Rules). to This r from Spain BordoFrance,Argentina, Japan, from Mitchell. 1870-1969 (pounds 000s). current GDPprices in Supply Determinants, comes Proximate I.(3) andTable Mone multiplier, comes M3 M3GDP M3, and from Webber Capie (2005), POLITY2 POLITY2 XCONST IV User’son the Dataset variables, POLITY Project Manual. see 1800-2004. For Regime Characteristics andProject. Transitions, Political mor rangersfrom P +10 (strongly democratic) –10(strongly autocratic). to Source:

is the revised Combined Polity Score (POLITY). It PolitypolityCombined the a revised(POLITY). is is unified Score sc

et al. 234

(2001). (2001). e-year average. For average.e-year the d Authority (1) to cal Regime efers the Extent to e information OLITY IVOLITY s, whethers, ale that y CEU eTD Collection (yearlyB.2: Descriptive data), 1865-1913 statistics RELYINCOME 79.557 180.642 28.996 33.996 681 681 33.996 28.996 180.642 79.557 RELYINCOME INVESTMENT 13.975 32.538 2.875 5.178 617 617 5.178 2.875 32.538 13.975 INVESTMENT TRADEGDP 28.219 61.881 2.841 14.919 551 551 14.919 2.841 61.881 28.219 TRADEGDP GGROWTH 1.342 17.515 -15.810 3.546 681 681 3.546 -15.810 17.515 1.342 GGROWTH SAVINGS 12.362 30.087 -18.676 6.137 601 601 6.137 -18.676 30.087 12.362 SAVINGS GOVBAL -0.489 17.660 -14.695 2.599 536 536 2.599 -14.695 17.660 -0.489 GOVBAL POLITY2 1.445 10 -10 5.767 681 681 5.767 -10 10 1.445 POLITY2 YTHDEP 33.566 45.070 24.811 3.548 681 681 3.548 24.811 45.070 33.566 YTHDEP M2GDP 0.397 0.905 0.119 0.185 546 546 0.185 0.119 601 0.905 4.733 0.397 -30.405 M2GDP 8.625 -1.587 CAGDP Mean Maximum Minimum Std. Dev. Observations Observations Dev. Std. Minimum Maximum Mean 235

CEU eTD Collection

B.3: Pairwise correlations

Table B.3.1: Pairwise correlations (yearly data) RELY SAVING INVEST GGROW GOVBA YTHDE POLITY TRADE CAGDP INCOM M2GDP S MENT TH L P 2 GDP E CAGDP 1.000 0.566 -0.241 -0.120 0.015 0.041 -0.444 0.244 -0.097 0.151 SAVINGS 0.566 1.000 0.663 0.023 -0.028 0.104 -0.219 0.261 0.143 0.115 INVEST -0.241 0.663 1.000 0.135 -0.045 0.076 0.144 0.086 0.247 -0.002 MENT RELY -0.120 0.023 0.135 1.000 -0.046 -0.076 0.243 -0.005 0.561 0.387 INCOME GGROWTH 0.015 -0.028 -0.045 -0.046 1.000 -0.028 0.069 0.031 0.028 -0.005 GOVBAL 0.041 0.104 0.076 -0.076 -0.028 1.000 0.012 -0.156 0.149 -0.090 YTHDEP -0.444 -0.219 0.144 0.243 0.069 0.012 1.000 -0.364 0.113 -0.089 M2GDP 0.244 0.261 0.086 -0.005 0.031 -0.156 -0.364 1.000 -0.022 0.716 POLITY2 -0.097 0.143 0.247 0.561 0.028 0.149 0.113 -0.022 1.000 0.054 TRADE 0.151 0.115 -0.002 0.387 -0.005 -0.090 -0.089 0.716 0.054 1.000 GDP

Table B.3.2: Pairwise correlations (5-year averages) SAV INVEST RELYI GGRO GOVBA TRADE YTHDE CAGDP M2GDP POLITY INGS MENT NCOME WTH L GDP P CAGDP 1.000 0.551 -0.253 -0.127 0.044 0.015 0.286 -0.096 0.204 -0.489 SAVINGS 0.551 1.000 0.669 0.018 0.024 0.131 0.314 0.171 0.157 -0.251 INVEST -0.253 0.669 1.000 0.132 0.004 0.121 0.114 0.267 0.006 0.144 MENT RELYI -0.127 0.018 0.132 1.000 -0.064 -0.112 -0.017 0.570 0.375 0.236 NCOME GGROWTH 0.044 0.024 0.004 -0.064 1.000 0.049 0.038 0.060 -0.003 0.156 GOVBAL 0.015 0.131 0.121 -0.112 0.049 1.000 -0.169 0.168 -0.122 0.018 M2GDP 0.286 0.314 0.114 -0.017 0.038 -0.169 1.000 -0.010 0.729 -0.374 POLITY2 -0.096 0.171 0.267 0.570 0.060 0.168 -0.010 1.000 0.055 0.102 TRADE 0.204 0.157 0.006 0.375 -0.003 -0.122 0.729 0.055 1.000 -0.098 GDP YTHDEP -0.489 -0.251 0.144 0.236 0.156 0.018 -0.374 0.102 -0.098 1.000

236 CEU eTD Collection InflationTable Factoraverages, B.4.1: (5-year Variance 1865-1913) B.4: VarianceFactor Inflation Variable Variable I 233 ,4 124 ,3 1,9 243 ,2 8,41 1,427 2,403 10,899 2,434 1,214 1,043 2,343 VIF income income Rely Rely ggrowth govbal m2gdp polity2 tradegdp ythdep ythdep tradegdp polity2 m2gdp govbal ggrowth 237

polity2* polity2* m2gdp m2gdp 8 CEU eTD Collection alternative significant effects hypothesis: chisq = p-value 812.3594,df = < 2, 2.2e-16 totsd tradegdp+relyincome + ythdep cagdpggrowth m2gdpEquation: + + *m2gdp =+ gov + + polity2 polity2 Lagrange Test5.3: -effects two-ways (Breusch-Pag Multiplier alternative significant effects hypothesis: chisq = = 0.666 0.1863,df = 1, p-value totsd tradegdp+relyincome + ythdep cagdpggrowth m2gdpEquation: + + *m2gdp =+ gov + + polity2 polity2 Lagrange Test5.2: - effects time (Breusch-Pagan) Multiplier alternative significant effects hypothesis: chisq = p-value 812.1731,df = < 1, 2.2e-16 totsd tradegdp+relyincome + ythdep cagdpggrowth m2gdpEquation: + + *m2gdp =+ gov + + polity2 polity2 Lagrange effects Test (Breusch-Pagan)5.1: – individual Multiplier B.5: Lagrange Multiplier Test 238

an) an) bal + bal bal + bal + bal CEU eTD Collection effects -Table cross-section random B.6.1: Test Hausman totsd tradegdp+relyincome + ythdepm2gdp + + *m2gdp + g + cagdp+ggrowth Equation: polity2 polity2 = B.6: Hausman Test Random (Correlated Effects) Cross-section random Cross-section Test Summary Test

Chi-Sq. Statistic Chi-Sq. 21.480

239

Chi-Sq. d.f Chi-Sq. 9

0.011 Prob. ovbal + ovbal

CEU eTD Collection effects fixed TableF-Test - period B.7.3: F Cross-Section/Period TableF-Test - fixed cross-section and B.7.2: effects period Table effectsF-Test - cross-section fixed B.7.1: totsd tradegdp+relyincome + ythdepm2gdp + + *m2gdp + g + cagdp+ggrowth Equation: polity2 polity2 = Fixed Tests) B.7: F-test(Redundant Effects Cross-section Chi-square Cross-section Chi-square Cross-section Cross-Section/Period Cross-Section/Period Period Chi-square Period Chi-square Period Cross-section F Cross-section F Cross-section Effects TestEffects TestEffects TestEffects Chi-square Period F Period F Period

133.803 129.150 115.250 Statistic Statistic Statistic 18.553 14.172 13.268 4.654 0.421 8.950 1.490

240

(22,60) (13,60) (13,69) (9,60) (9,73) d.f. d.f. d.f. 22 13 13 9 9

0.000 0.000 0.029 0.173 0.000 0.000 0.000 0.000 0.863 0.920 Prob. Prob. Prob. ovbal + ovbal

CEU eTD Collection originalalternative errors correlation in serial hypothesis: chisq == 24.304, p-value 8.227e-07 panelcorrelation in B.8.6: Wooldridge's for test first-difference serial idiosyncraticalternative correlation in errors serial hypothesis: chisq = = 0.1566 3.7076,df = 2, p-value correlation model forB.8.5: panel test in Breusch-Godfrey/Wooldridge serial errorsalternative effects AR(1) sub random hypothesis: = 3.8434, p-valuez = 6.066e-05 B.8.4: test Bera, and Yoon locally Sosa-Escudero robust alternative errors random sub AR(1) effects hypothesis: chisq = p-value 23.8411,df = = 1, 1.046e-06 B.8.3: test Bera, and Yoon locally Sosa-Escudero robust alternative effects errors or AR(1) random hypothesis: chisq < = 2.2e-16 69.248,df = 2, p-value test joint Li B.8.2: and Baltagi AR-RE alternative effect unobserved hypothesis: = 2.1211, p-valuez = 0.03391 forB.8.1: effects Wooldridge's individual unobserved test B.8: Autocorrelation tests 241

s s CEU eTD Collection 1865-1914 B.9: Implied current accounts, 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-9470-74 95-99 75-79 80-84 1865-69 1865-69 70-74 75-79 80-84 85-89 90-9470-74 95-99 1900-0475-79 80-84 1865-69 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-9470-74 95-99 75-79 80-84 1865-69 12 16 -8 -8 -8 -4 -4 -4 0 4 8 0 4 8 0 4 8 FRA - FE - FRA GER - FE UK - FE UK - 05-09 1910-14 05-09 1910-14 05-09 1910-14 FITTED ACTUAL 242 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-0475-79 80-84 85-891865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-0475-79 80-84 85-891865-69 70-74 12 16 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 75-791900-04 80-84 1865-6985-89 70-74 -8 -8 -4 -4 -4 -8

0 4 8 0 4 8 0 4 8 UPPER LOWER GER - PCSE GER UK - PCSE UK - FRA - PCSE FRA - 05-09 1910-14 05-09 05-09 1910-14 05-09 1910-14 05-09

CEU eTD Collection

1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 90-94 95-99 80-84 85-89 70-74 75-79 1865-69 -16 -20 -16 -12 -12 -16 -12 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-94 75-79 80-84 1865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-94 75-79 80-84 1865-69 70-74 12 -8 -4 -8 -4 -8 -4 0 4 8 0 4 0 4 ARG - FE ARG - USA - FE - USA CAN - FE - CAN 05-09 1910-14 05-09 05-09 1910-14 05-09 1910-14 FITTED ACTUAL 243 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-0480-84 85-89 90-94 70-74 75-79 1865-69 -16 -20 -12 -12 -12 -16 -16 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-94 75-79 80-84 1865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-0480-84 85-89 70-74 75-79 1865-69 12

-8 -4 -8 -4 -8 -4 0 4 0 4 8 0 4 UPPER LOWER ARG - PCSE ARG - CAN - PCSE - CAN USA - - PCSE USA 05-09 1910-14 05-09 1910-14 05-09 05-09 1910-14

CEU eTD Collection

1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 80-84 85-89 90-94 70-74 75-79 1865-69 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-94 70-7495-99 75-79 80-84 1865-69 -12 -10 -12 12 -8 -4 -8 -6 -4 -2 -8 -4 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-94 95-99 70-74 75-79 80-84 1865-69 0 4 0 2 4 6 0 4 8 SWE - - FE SWE NOR NOR - FE DEN - - FE DEN 05-09 1910-14 05-09 05-09 1910-14 05-09 1910-14 FITTED ACTUAL 244 -12 -12 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-0475-79 80-84 85-891865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-0475-79 80-84 85-891865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 85-89 90-94 95-99 70-74 75-79 80-84 1865-69 12

-8 -8 -4 -8 -4 -4 0 4 8 0 4 0 4 UPPER LOWER NOR -NOR PCSE DEN - - PCSE DEN SWE - PCSE - SWE 05-09 1910-14 05-09 1910-14 05-09 1910-14

CEU eTD Collection

-10 -12 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 90-94 95-99 85-89 75-79 80-84 1865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 95-99 85-89 90-94 75-79 80-84 70-74 1865-69 12 10 15 12 -8 -4 -8 -4 -5 0 4 8 0 4 8 0 5 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 90-94 95-99 85-89 75-79 80-84 1865-69 70-74 JPN - FE JPN RUS - FE - RUS ITA - FE 05-09 1910-14 05-09 05-09 1910-14 05-09 ACTUAL FITTED 05-09 1910-14 05-09 245 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 90-94 95-99 80-84 85-89 75-79 1865-69 70-74 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 90-94 80-84 85-89 70-74 75-79 1865-69 1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 90-94 95-99 80-84 85-89 75-79 1865-69 70-74 -12 -10

10 15 12 12 -8 -5 -4 -8 -4 UPPER LOWER 0 5 0 4 8 0 4 8 RUS - PCSE RUS JPN - PCSE JPN ITA - ITAPCSE - 05-09 1910-14 05-09 1910-14 05-09 1910-14

CEU eTD Collection

1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 95-99 85-89 90-94 80-84 75-79 1865-69 70-74 -12 12 -8 -4 0 4 8 AUS - FE -AUS 05-09 1910-14 FITTED ACTUAL 246 -2 -4

1865-69 70-74 75-79 80-84 85-89 90-94 95-99 1900-04 95-99 85-89 90-94 80-84 75-79 1865-69 70-74 0 2 4 6 8 UPPER LOWER SPA - FE - SPA 05-09 1910-14

CEU eTD Collection yearly,Table 1865-1913 regressions, account B.10.1: Current B.10: Regressions 1865-1913 frequency, at yearly Adjusted R-squared 0.614 0.795 0.795 0.614 R-squared Adjusted M2GDP*POLITY2 M2GDP*POLITY2 Durbin-Watson stat 0.683 1.986 1.986 0.683 stat Durbin-Watson RELYINCOME RELYINCOME TRADEGDP TRADEGDP Observations 472 458 458 472 Observations GGROWTH GGROWTH GOVBAL GOVBAL R-squared 0.631 0.805 0.805 0.631 R-squared POLITY2 POLITY2 YTHDEP YTHDEP M2GDP M2GDP ape 4 14 14 Sample Model FE country PCSE PCSE country FE Model R1 AR(1) C C (0.183, 0.101) (0.183, 0.180) (0.037, 0.020) (7.514, (0.003, 0.552) (0.003, 0.450) (0.026, 0.680) (0.084, 0.002) (0.057, 0.005) (0.127, 0.171) (0.054, 17.494 17.494 -0.301 -0.301 -0.035 -0.035 -0.362 -0.073 0.050 0.050 0.002 0.002 0.020 0.182 247

(0.054, 0.000) (0.054, (0.175, 0.063) (0.175, 0.260) (0.024, 0.147) (7.284, (0.003, 0.260) (0.003, 0.941) (0.023, 0.289) (0.044, 0.111) (0.087, 0.217) (0.172, 0.341) (0.035, 10.588 10.588 -0.328 -0.328 -0.027 -0.002 -0.002 -0.046 -0.213 -0.033 0.697 0.697 0.004 0.004 0.138 CEU eTD Collection yearly, Table 1865-1913 B.10.2: regressions, Savings Adjusted R-squared 0.703 0.796 0.796 0.703 R-squared Adjusted M2GDP*POLITY2 M2GDP*POLITY2 Durbin-Watson stat 0.878 2.408 2.408 0.878 stat Durbin-Watson RELYINCOME RELYINCOME TRADEGDP TRADEGDP bevtos 7 471 Observations GGROWTH GGROWTH GOVBAL GOVBAL R-squared 0.746 0.806 0.806 0.746 R-squared POLITY2 POLITY2 YTHDEP YTHDEP M2GDP M2GDP ape 4 14 14 Sample Model FE twoways twoways FE Model AR(1) AR(1) C C (10.882, 0.660) (10.882, (0.128, 0.038) (0.128, 0.806) (0.048, (0.007, 0.228) (0.007, 0.053) (0.040, 0.624) (0.368, 0.025) (0.047, (0.494, 0.642) (0.494, 0.079) (0.084, -0.008 -0.008 -0.078 -4.785 0.265 0.265 0.012 0.181 0.181 0.105 0.230 0.230 0.149

248

(10.333, 0.273) (10.333, (0.047, 0.000) (0.047, (0.055, 0.121) (0.055, 0.080) (0.030, (0.005, 0.531) (0.005, 0.094) (0.032, 0.455) (0.258, 0.008) (0.042, (0.273, 0.844) (0.273, 0.064) (0.087, PCSE FE FE PCSE country country 11.332 11.332 -0.052 -0.052 -0.054 -0.054 -0.193 -0.054 -0.054 0.679 0.679 0.086 0.086 0.003 0.003 0.111 0.162 0.162 CEU eTD Collection yearly, regressions, TableInvestment 1865-1913 B.10.3: Adjusted R-squared 0.748 0.825 0.825 0.748 R-squared Adjusted M2GDP*POLITY2 -0.012 -0.012 M2GDP*POLITY2 Durbin-Watson stat 0.890 2.427 2.427 0.890 stat Durbin-Watson RELYINCOME 0.207 0.207 RELYINCOME TRADEGDP 0.301 0.301 TRADEGDP Observations 463 463 Observations GGROWTH -0.010 -0.010 GGROWTH GOVBAL 0.019 0.019 GOVBAL R-squared 0.784 0.834 0.834 0.784 R-squared POLITY2 0.696 0.696 POLITY2 YTHDEP 0.483 0.483 YTHDEP M2GDP -0.040 -0.040 M2GDP ape 4 14 14 Sample Model FE twoways twoways FE Model R1 AR(1) C -25.250 -25.250 C (11.333, 0.026) (11.333, (0.008, 0.108) (0.008, 0.181) (0.519, 0.206) (0.031, 0.001) (0.094, 0.852) (0.104, 0.103) (0.295, 0.848) (0.052, 0.002) (0.067,

249

(10.110, 0.911) (10.110, (0.045, 0.000) (0.045, (0.005, 0.990) (0.005, 0.369) (0.279, 0.068) (0.028, 0.021) (0.050, 0.749) (0.065, 0.928) (0.259, 0.319) (0.025, 0.000) (0.039, PCSE FE FE PCSE -0.051 -0.051 -0.025 0.696 0.696 1.131 1.131 0.000 0.000 0.251 0.115 0.021 0.023 0.143

CEU eTD Collection model,B.11: Between 1978-1913 M2GDP*POLITY2 0.016 0.016 M2GDP*POLITY2 RELYINCOME 0.069 0.069 RELYINCOME TRADEGDP -0.128 -0.128 TRADEGDP Observations 472 472 477 477 472 472 Observations GGROWTH -4.592 -4.592 GGROWTH GOVBAL 0.612 0.612 GOVBAL R-squared 0.797 0.531 0.697 0.697 0.531 0.797 R-squared POLITY2 -0.776 -0.776 POLITY2 YTHDEP 0.033 0.033 YTHDEP M2GDP 0.111 0.111 M2GDP ape 4 4 14 14 14 Sample IV CAGDP SAVINGS INVESTMENT INVESTMENT SAVINGS CAGDP IV C -1.808 -1.808 C (11.403, 0.880) (11.403, (0.012, 0.236) (0.012, 0.122) (0.417, 0.224) (0.080, 0.191) (0.085, 0.195) (0.409, 0.921) (0.321, 0.021) (1.384, 0.115) (0.036, 250

(26.013, 0.512) (26.013, (0.027, 0.292) (0.027, 0.522) (0.951, 0.097) (0.183, 0.180) (0.193, 0.332) (0.933, 0.391) (0.732, 0.834) (3.158, 0.974) (0.083, -18.362 -18.362 -0.655 -0.655 -0.301 -0.003 0.031 0.031 0.374 1.003 0.687 0.696 (19.106, 0.396) (19.106, (0.139, 0.267) (0.139, 0.282) (0.060, (0.019, 0.468) (0.019, 0.855) (0.690, 0.100) (0.137, 0.564) (0.680, 0.263) (0.534, 0.067) (2.300, -17.712 -17.712 -0.174 -0.174 -0.072 0.015 0.015 0.132 0.276 0.420 0.674 5.374 CEU eTD Collection Notes: SPREAD sample: ARG, AUS, CAN, DEN, ITA, NOR, ITA, DEN, CAN, AUS, ARG, sample: SPREAD Notes: balance onCA M2GDP onSPREADconditional Table of B. Effect 12.3: (PCSE onM2GDP model) Table balance onCA conditional of B.12.2: SPREAD Effect Table 1865-1913 regressions, account B.12.1: Current testsB.12: Robustness

Adjusted R-squared 0.737 0.774 0.815 0.775 0.775 0.815 0.774 0.737 R-squared Adjusted Durbin-Watson stat 1.381 1.762 1.890 1.864 1.864 1.890 1.762 1.381 stat Durbin-Watson RELYINCOME RELYINCOME Effect of SPREAD SPREAD of Effect Value of SPREAD SPREAD ofValue TRADEGDP TRADEGDP bevtos 7 2 0 40 50 72 87 Observations GGROWTH GGROWTH Effect of M2GDP M2GDP of Effect M2GDP*IQ Value of M2GDP M2GDP ofValue (12.962, 87.254) 19.205 38.139 72.670 72.670 38.139 19.205 87.254) (12.962, (9.838, 622.209) 622.209) (9.838, Time span 1865-1913 1870-1913 1880-1913 1885-1913 1885-1913 1880-1913 1870-1913 1865-1913 span Time GOVBAL GOVBAL R-squared 0.804 0.847 0.906 0.833 0.833 0.906 0.847 0.804 R-squared YTHDEP YTHDEP IQ proxy XCONST XCONST SPREAD SPREAD SPREAD SPREAD XCONST XCONST proxy IQ M2GDP M2GDP TOTSD TOTSD ape 4 4 0 10 10 14 14 Sample Model FE country PCSE FE country FE twoways PCSE PCSE twoways FE country FE PCSE country FE Model R1 AR(1) IQ IQ C C

Low 10 percentile Mean High 10 Percentile Percentile 10 High Mean percentile 10 Low (0.042, 0.511) (0.042, 0.468) (0.113, 0.001) (0.126, (8.370, 0.014) (8.370, (1.264, 0.667) (1.264, (0.026, 0.479) (0.026, (0.153, 0.608) (0.153, (0.219, 0.666) (0.219, 0.003) (0.181, 0.143) (0.072, 21.218 21.218 -0.028 -0.028 -0.431 -0.019 -0.019 -0.079 -0.079 -0.107 -0.107 0.083 0.083 0.546 0.546 0.095 0.095 0.567 Low 10 percentile Mean High 10 Percentile Percentile 10 High Mean percentile 10 Low (0.015, 0.026) (0.015, (0.100, 0.122) (0.100, 45.326 140.365 283.701 283.701 140.365 45.326 -0.159 -0.159 0.036 0.036 (14.975, 0.127) (14.975, (0.182, 0.013) (0.182, (0.052, 0.830) (0.052, 0.245) (0.142, 0.421) (0.373, (1.525, 0.907) (1.525, (0.027, 0.715) (0.027, (0.122, 0.507) (0.122, (0.059, 0.025) (0.059, (0.174, 0.572) (0.174, 0.011) (0.178, 23.267 23.267 -0.011 -0.011 -0.167 -0.303 -0.179 -0.179 -0.135 -0.135 0.471 0.471 0.010 0.010 0.082 0.082 0.099 0.099 0.472 251

RUS, SPA, SWE, USA, USA, SWE, SPA, RUS, (0.015, 0.761) (0.015, (0.081, 0.001) (0.081, -0.318 -0.318 0.005 0.005 (28.872, 0.033) (28.872, (0.070, 0.276) (0.070, 0.165) (0.097, 0.047) (0.450, (0.043, 0.543) (0.043, (0.001, 0.693) (0.001, (0.169, 0.025) (0.169, (0.167, 0.103) (0.167, (0.273, 0.008) (0.273, 0.005) (0.294, 65.368 65.368 -0.078 -0.078 -0.138 -0.941 -0.404 -0.404 -0.282 -0.282 0.026 0.026 0.000 0.000 0.785 0.785 0.900

(0.033, 0.120) (0.033, (0.136, 0.000) (0.136, (25.342, 0.798) (25.342, (0.039, 0.000) (0.039, (0.046, 0.851) (0.046, 0.500) (0.122, 0.787) (0.527, (0.025, 0.010) (0.025, (0.001, 0.025) (0.001, (0.173, 0.177) (0.173, (0.061, 0.212) (0.061, (0.387, 0.170) (0.387, 0.000) (0.158, -0.053 -0.053 -0.558 -0.558 -0.009 -0.009 -0.083 -0.144 -6.556 -6.556 -0.002 -0.002 -0.239 -0.239 -0.078 -0.078 1.032 1.032 0.068 0.068 0.545 0.545 0.631 CEU eTD Collection (YEM),Zambia Africa (ZMB). (ZAF), South Ukraine Venezuela, United (VEN (USA), States (URY), Uruguay RB (UKR), (TZ (THA),(SWZ), (TUN), Tunisia Tanzania Togo (TGO), Thailand Chad (TCD), Republic (SVK),Salvador Swaz (SVN), Slovenia (SLV), (SWE), Slovak Sweden Leone FederationRussian (SLE (RUS), Rwanda (SGP), Sierra Singapore (RWA), Guinea(POL),Peru Paragu (PRT), Portugal (PNG), (PER), Papua New Poland (OMN),(NLD), ZealandOman (NZL), (PAKNew Pakistan (NPL), Nepal (MUS),Malaysia (NAM), Malawi (MYS), (MWI), Namibia Nicarag Mauritania Ma (MDG), (MLI),Mali (MEX), (MRT), (MMR), Mexico Myanmar (LVA), Ma (MDA), LithuaniaLatvia(LKA),(LTU),Lesotho (LSO), Moldova LebanonKyrgyz Korea,(KOR), (KWT),( Republic (KGZ), Kuwait Rep, Kazakhstan (KA (JOR), (JPN), Italy Jordan Japan (ITA), (JAM), Jamaica IndiaIslamicIran,IrelandIndonesia (CHN),(IND), (IDN), (IRL), (CHE), ( Chile Croatia (HTI), (HUN), Hungary (HRV), Switzerland Haiti (GUY), Guyana Guatemala Hondura Georgia(GRC), (GTM), (GEO), Greece France(EST),Finland (ETH), Ethiopia (FJI),Fiji (FIN), (FRA), Uni ( ArabEcuador(DOM), Rep, (EGY), Spain Egypt, (DZA), Algeria (ECU), Republic(CYP), (CZE), Czech (DEU),DenmarkDomini Germany (DNK), Canada (COL), Rica Dem, Costa (CRI), Colombia Congo, Rep,(ZAR), Cypr (CAN), BoliviaBrazil(BHR), (BRA), (BOL),Belarus Bhutan (BLR), Bots (BTN), BurkinaBelgiumFasoBulgaria(AUT),Burundi (BEL),(B (BFA), (BDI), ArmeniaAustraUnited Argentina Arab (ARE), (ARM), (ARG), Emirates B.13: Base sample 1970-2007 252

Rep, (IRN), Israel (ISR), Rep, (IRN), ted Kingdom (GBR),ted ua (NIC), Netherlandsua (NIC), LBN),Lanka Sri Z),(KEN), Kenya lia (AUS), Austria lia CHL), China ), Panama (PAN),), GR), Bahrain ESP), Estonia Estonia ESP), wana (BWA), can Republic s (HND),s ), Yemen, Rep, dagascar ay (PRY), uritius uritius iland iland ), El A), A), us us CEU eTD Collection Notes: Oil/gas exporting countries are Algeria, Ang Algeria, are countries exporting Oil/gas Notes: of the External Wealth of Nations Mark II database database II Mark Nations of Wealth theofExternal 113 1994-2008. Zimbabwe 2008, 1998-20 Turkmenistan 1999-2008, Timor-Lesotho 2008, Le 2004-2008, Iraq 2001-2008, Iran -1980-1997, Kong Eq 1980-2008, Rep. Dem. Congo, -1986-1994, Cambodia Bhutan, 1992-2008, Algeria, 2002-2008, Afghanistan B.14: Data sources ECONGROWTH WDI Real GDP growth growth GDP Real WDI ECONGROWTH POLITY IV Project. IV Project. POLITY Lane a (WDI), Indicators Development World Sources: and Venezuela, Emirates, Arab United Turkmenistan, Nig Libya, Kuwait, Kazakhstan, Iran, Gabon, Guinea, 112 INVESTMENT WDI Investment (%GDP) (%GDP) Investment WDI INVESTMENT OVERHEAD BDL accounting value of a bank’s overhead overhead bank’s a of value accounting BDL OVERHEAD RELYOECD WDI Real per capita GDP relative to OECD a OECD to relative GDP capita per Real WDI RELYOECD TRADEGDP WDI Trade (%GDP) as a measure of trade ope measuretrade of a as (%GDP) Trade WDI TRADEGDP For more information on the variables, see POLITY POLITY see variables, the on more information For Data WDI. from GDP) of (% balance account Current SAVINGS WDI Savings (%GDP) (%GDP) Savings description Variable WDI Source SAVINGS Mnemonic GOVBAL WDI Cash surplus surplus Cash WDI GOVBAL KAOPEN KAOPEN POLITY2 POLITY2 MARGIN BDL BDL MARGIN XCONST XCONST CREDIT BDL BDL CREDIT CAGDP WDI Current account as a percentage of GDPof percentage a as account Current WDI CAGDP M3GDP WDI Liquid liabilities (%GDP) (%GDP) liabilities Liquid WDI M3GDP STOCK BDL STOCK MARKET CAPITALIZATION / GDP / CAPITALIZATION MARKET STOCK BDL STOCK TOTSD WDI Standard deviation of terms of trade trade of terms of deviation Standard WDI TOTSD NFAin LMF LMF NFAin SMTO BDL STOCK MARKET TURNOVER RATIO RATIO TURNOVER MARKET STOCK rat a as marketcapitalization bond public BDL BDL BDL SMTV SMTO PBBM DEPR WDI Age dependency ratio (% of working-age pop working-age of (% ratio Agedependency WDI DEPR REER WDI Real effective exchange rate rate exchange effective Real WDI REER SIZE BDL STOCK+CREDIT STOCK+CREDIT BDL SIZE OIL Dummy for oil/gas exporting countries countries oil/gasexporting for Dummy OIL POLITY IV IV POLITY POLITY IV IV POLITY Chinn-Ito Chinn-Ito Project (2007c) (2007c) Project Project 113

Polity Score (-10, 10). Higher values indicate high Higherindicate values 10). (-10, PolityScore index to measure a country’s degree of capital acco capital of degree country’s a measure indexto accounting value of bank’s net interest revenue as interestrevenue net bank’s of value accounting PRIVATE CREDIT BY DEPOSIT MONEY BANKS AND OTHER OTHER AND BANKS MONEY DEPOSIT BY CREDIT PRIVATE stock market total value as a ratio to GDP, as a me a as GDP, to ratio a valueas markettotal stock net foreign assets relative to GDP (in the initial the(ininitial GDP to relative assets netforeign values of this index indicate greater financialope greater indicate index this of values ola, Azerbaijan, Bahrain, Congo, Ecuador, Equatoria Ecuador, Congo, Bahrain, Azerbaijan, ola, (LMF), Beck, Demirgüç-Kunt and Levine (2000) - BDL, Levine(2000) and Demirgüç-Kunt Beck, (LMF), eria, Norway, Oman, Qatar, Russia, Saudi Arabia, Sy Arabia, Saudi Russia, Qatar, Oman, Norway, eria, Yemen. Timor Leste. Leste. Timor Yemen. 253 1980-2008, Brunei, 1985-2008, Burkina Faso 1995-200 Faso Burkina 1985-2008, Brunei, 1980-2008, nd Milesi-Ferretti (2007) - updated and extended ve extended and - updated (2007) Milesi-Ferretti nd IV Project Dataset User’s Manual. User’s Dataset Manual. Project IV banon 1980-2001, Montenegro 2003-2008, Qatar 1980- Qatar 2003-2008, Montenegro 1980-2001, banon 08, United Arab Emirates 1980-2008, Uzbekistan 1996 Uzbekistan 1980-2008, Emirates Arab United 08, FINANCIAL INSTITUTIONS / GDP GDP / INSTITUTIONS FINANCIAL uatorial Guinea, 1980-2008, Eritrea 2003-2008, Hong 2003-2008, Eritrea 1980-2008, Guinea, uatorial

for following countries come from WEO April 2009: 2009: April WEO from come countries following for bearing (total earning) assets assets earning) (total bearing Executive Constraints Constraints Executive market activeness marketactiveness average) average) costs as a share of its total assets assets total its ofshare a as costs er institutional quality. quality. institutional er year of each 5-year 5-year yeareach of a share of itsinterest- of share a unt openness. Higher Higher untopenness. io to GDP to io asure of financial financial of asure verage verage nness nness 112 ulation) ulation)

nness nness l ria, ria, rsion rsion

8, -

CEU eTD Collection

B.15: Descriptive statistics

Table B.15.1: Descriptive statistics, explanatory variables

INVEST ECON TRADE CAGDP SAVINGS RELYOECD POLITY2 KAOPEN GOVBAL NFA DEPR MENT GROWTH GDP Mean -2,571 19,368 22,615 3,915 33,129 1,838 0,214 -2,550 -33,681 70,809 67,555 Std. Dev. 9,594 10,028 8,325 5,614 44,177 7,477 1,562 6,723 84,384 19,417 41,351 Maximum 99,406 85,166 80,394 81,888 354,670 10,000 2,541 60,018 550,510 116,471 456,646 Minimum -240,496 -42,165 -23,763 -50,248 0,262 -10,000 -1,808 -185,983 -2566,358 25,246 0,309 Observations 3211 2888 4260 4402 4459 4655 3438 3114 3572 5240 4285

Table B.15.2: Descriptive statistics, proxies of financial development

FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Mean 54,267 101,542 40,725 41,115 34,285 40,827 23,815 5,150 4,394 Std. Dev. 296,665 84,002 47,843 36,864 27,181 55,408 46,220 3,582 2,942 Maximum 11511,300 470,633 303,442 202,417 324,673 622,425 427,854 32,960 26,980 Minimum 0,151 3,999 0,013 0,397 0,000 0,000 0,000 0,672 0,177 Observations 4245 1362 1479 3479 774 1527 1543 1547 1554

254 CEU eTD Collection

B.16: Pairwise correlations

INVEST ECON TRADE CAGDP SAVINGS RELYOECD POLITY2 KAOPEN GOVBAL NFA DEPR MENT GROWTH GDP CAGDP 1 0,507 -0,140 -0,019 0,294 0,014 0,154 0,402 0,387 -0,212 0,0461 SAVINGS 0,507 1 0,622 0,155 0,217 0,163 0,138 0,294 0,472 -0,389 0,1568 INVEST -0,140 0,622 1 0,184 0,079 0,062 0,027 0,034 0,066 -0,241 0,2671 MENT ECON -0,019 0,155 0,184 1 -0,037 -0,092 0,007 0,153 0,098 0,059 0,0169 GROWTH RELYOECD 0,294 0,217 0,079 -0,037 1 0,393 0,542 0,144 0,342 -0,513 0,0112 POLITY2 0,014 0,163 0,062 -0,092 0,393 1 0,288 0,008 -0,026 -0,470 0,0542 KAOPEN 0,154 0,138 0,027 0,007 0,542 0,288 1 0,164 0,228 -0,451 0,2242 GOVBAL 0,402 0,294 0,034 0,153 0,144 0,008 0,164 1 0,538 -0,143 0,0386 NFA 0,387 0,472 0,066 0,098 0,342 -0,026 0,228 0,538 1 -0,265 0,0175 DEPR -0,212 -0,389 -0,241 0,059 -0,513 -0,470 -0,451 -0,143 -0,265 1 -0,1876 TRADEGDP 0,046 0,157 0,267 0,017 0,011 0,054 0,224 0,039 0,017 -0,188 1

255 CEU eTD Collection

B.17: VIFs for the 5-year averages

ECON Explanatory RELY POLI M3 KAO GOV TRADE POLITY2* POLITY2* KAOPEN* GRO NFAIN DEPR TOTSD variable OECD TY2 GDP PEN BAL GDP M3GDP KAOPEN M3GDP WTH VIF 2,328 1,26 4,933 2,239 5,731 1,503 1,312 2,212 1,284 1,235 9,74 3,436 12,036

256 CEU eTD Collection

B.18: Current account regression controlling for the terms of trade volatility FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE country FE twoways FE twoways FE twoways FE country FE twoways FE country FE country FE country 9.709 14.121 12.520 13.413 6.452 10.654 12.344 22.431 18.726 C (7.703, 0.209) (7.134, 0.051) (7.172, 0.084) (7.009, 0.057) (9.598, 0.504) (10.391,0.308) (7.867, 0.119) (9.158, 0.016) (8.854, 0.037) -0.041 -0.025 -0.060 -0.032 -0.106 -0.104 -0.085 -0.095 -0.101 RELYOECD (0.031, 0.186) (0.044, 0.568) (0.033, 0.073) (0.032, 0.323) (0.050, 0.039) (0.048, 0.032) (0.038, 0.028) (0.053, 0.077) (0.049, 0.044) -0.095 -0.135 -0.011 -0.057 0.390 0.023 -0.015 0.017 0.290 POLITY2 (0.236, 0.689) (0.189, 0.479) (0.138, 0.935) (0.327, 0.862) (0.191, 0.045) (0.235, 0.924) (0.151, 0.919) (0.578, 0.977) (0.455, 0.525) 0.048 -0.073 -0.068 -0.021 0.136 -0.003 -0.032 -0.801 0.185 M3GDP (0.030, 0.111) (0.031, 0.020) (0.038, 0.076) (0.079, 0.792) (0.063, 0.035) (0.012, 0.769) (0.034, 0.349) (0.884, 0.367) (0.900, 0.838) 0.813 -0.136 -0.349 -0.576 0.318 -0.315 -0.461 -1.565 -1.436 KAOPEN (0.938, 0.387) (0.746, 0.856) (0.649, 0.592) (0.753, 0.445) (0.777, 0.683) (0.643, 0.626) (0.586, 0.433) (0.964, 0.108) (0.950, 0.134) 0.244 0.268 0.201 0.233 0.068 0.093 0.036 0.377 0.360 GOVBAL (0.142, 0.086) (0.190, 0.162) (0.199, 0.313) (0.134, 0.084) (0.376, 0.856) (0.229, 0.684) (0.186, 0.846) (0.248, 0.131) (0.227, 0.115) 0.002 0.066 0.066 0.093 0.022 0.071 0.058 0.063 0.059 NFAIN (0.003, 0.495) (0.023, 0.005) (0.024, 0.006) (0.031, 0.004) (0.028, 0.430) (0.030, 0.018) (0.028, 0.045) (0.035, 0.073) (0.035, 0.101) -0.160 -0.202 -0.202 -0.121 -0.110 -0.115 -0.164 -0.226 -0.238 DEPR (0.086, 0.065) (0.090, 0.027) (0.102, 0.049) (0.077, 0.116) (0.134, 0.415) (0.108, 0.291) (0.079, 0.041) (0.129, 0.083) (0.117, 0.046) -0.001 0.003 0.003 -0.002 -0.015 0.000 0.003 0.056 -0.004 POLITY2*M3GDP (0.003, 0.835) (0.003, 0.228) (0.004, 0.524) (0.008, 0.837) (0.008, 0.060) (0.002, 0.958) (0.003, 0.441) (0.110, 0.613) (0.106, 0.969) 0.061 -0.020 0.029 0.066 -0.022 0.095 0.092 0.006 0.046 POLITY2*KAOPEN (0.066, 0.359) (0.078, 0.797) (0.069, 0.671) (0.067, 0.333) (0.110, 0.843) (0.054, 0.081) (0.060, 0.126) (0.096, 0.947) (0.095, 0.625) -0.022 0.005 0.007 -0.001 -0.007 -0.004 -0.001 0.212 0.139 KAOPEN*M3GDP (0.012, 0.056) (0.007, 0.466) (0.011, 0.534) (0.012, 0.959) (0.018, 0.695) (0.008, 0.586) (0.010, 0.940) (0.132, 0.110) (0.144, 0.339) -0.015 0.114 0.092 0.016 0.059 0.040 0.043 0.013 0.005 TRADEGDP (0.036, 0.680) (0.033, 0.001) (0.030, 0.002) (0.032, 0.627) (0.036, 0.105) (0.033, 0.234) (0.025, 0.081) (0.043, 0.764) (0.046, 0.917) -0.091 -0.473 -0.301 -0.363 -0.357 -0.347 -0.317 -0.477 -0.349 ECONGROWTH (0.164, 0.580) (0.222, 0.036) (0.217, 0.170) (0.211, 0.087) (0.220, 0.110) (0.244, 0.157) (0.225, 0.160) (0.257, 0.067) (0.246, 0.159) 0.045 0.084 0.062 0.018 -0.002 0.032 0.033 0.026 0.022 TOTSD (0.040, 0.259) (0.054, 0.126) (0.049, 0.211) (0.045, 0.699) (0.052, 0.970) (0.046, 0.498) (0.043, 0.444) (0.039, 0.519) (0.038, 0.559) -0.002 PBBM*GOVBAL (0.005, 0.653) R-squared 0.662 0.839 0.817 0.743 0.839 0.804 0.788 0.865 0.864 Adjusted R-squared 0.509 0.721 0.690 0.613 0.722 0.671 0.665 0.753 0.754 Durbin-Watson stat 2.493 2.886 2.667 2.014 2.202 2.732 2.884 2.729 2.747 Sample 79 53 56 73 37 55 54 64 63 Observations 294 166 179 268 120 179 181 169 168 Time span 1980 - 2007 1980 - 2007 1980 - 2007 1980 - 2007 1990 - 2007 1980 - 2007 1980 - 2007 1990 - 2007 1990 - 2007

257 CEU eTD Collection Note: standard errors and p-valuesNote: parentheses and standard i errors onKAOPEN,and TablePBBM GOVBAL POLITY Effect B.19.a.4: of conditional onCA 2.541) 0.075, ( TablePOLITY2 onKAOPEN conditional Effect onCA B.19.a.3: of and M3GDP (-10,10) POLITY2 TableKAOPEN and onM3GDP Effect conditional onCA B.19.a.2: of POLITY2 (-10,10) POLITY2 onKAOPEN conditional Table onCA M3GDP and Effect B.19.a.1: of POLITY2 ofB.19.a.: equation estimation account 1, base Current sample, 1970-2007. B.19: Interaction terms Effect of PBBM on CAon PBBM of Effect M3GDP M3GDP Values of KAOPEN, KAOPEN, Valuesof POLITY, GOVBAL GOVBAL POLITY,

high 10 percentile 91.914 91.914 percentile high10 low 10 percentile 19.327 19.327 percentile low10 high 10 percentile 10 10 percentile high10 10 percentile high10 low 10 percentile -7.92 -7.92 percentile low10 low 10 percentile -7.92 -7.92 percentile low10

mean 49.985 49.985 mean mean 2.275 2.275 mean 2.275 mean (0.101, 0.006) (0.101, percentile percentile Low 10 10 Low 0.287 0.287 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (0.257, 0.511) (0.257, (0.170, 0.351) (0.170, (0.149, 0.309) (0.149, low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (0.037, (0.037, 0.146) 0.146) Mean Mean 0.055 0.055 (0.586, 0.688) (0.586, 0.365) (0.032, (0.593, 0.164) (0.593, 0.328) (0.031, (1.254, 0.269) (1.254, 0.518) (0.051, -1.265 0.249 2.541 2.541 -0.169 0.249 -1.265 -0.159 -0.159 -0.152 -0.152 258 19.327 49.985 91.914 91.914 49.985 19.327 -1.265 0.249 2.541 2.541 0.249 -1.265 0.403 0.403 0.029 0.828 0.828 0.031 1.390 1.390 0.033

KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN (0.046, 0.356) (0.046, KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN percentile percentile M3GDP ( 0.075, 2.541) 0.075, ( M3GDP High 10 10 High -0.043 -0.043 (0.261, 0.335) (0.261, (0.181, 0.182) (0.181, (0.165, 0.156) (0.165, (0.522, 0.460) (0.522, 0.703) (0.026, (0.028, 0.769) (0.028, (0.511, 0.939) (0.511, (0.051, 0.908) (0.051, (1.206, 0.619) (1.206, -0.252 -0.252 -0.243 -0.243 -0.235 -0.235 -0.386 -0.386 -0.010 -0.008 -0.008 -0.006 -0.006 0.039 0.039 0.601 0.601 KAOPEN and POLITY (high 10 10 (high POLITY and KAOPEN perc), GOVBAL (low 10 perc.) perc.) GOVBAL 10 (low perc), (0.359, 0.293) (0.359, (0.310, 0.236) (0.310, (0.304, 0.236) (0.304, (0.617, 0.018) (0.617, 0.017) (0.029, (0.033, 0.044) (0.033, (0.585, 0.077) (0.585, (0.056, 0.248) (0.056, (1.224, 0.697) (1.224, (0.046, 0.358) (0.046, -0.379 -0.379 -0.369 -0.369 -0.362 -0.362 -1.465 -1.465 -0.069 -0.067 -0.067 -1.039 -1.039 -0.065 -0.065 -0.478 -0.478 -0.043 -0.043 CEU eTD Collection TableGOVBAL Effect onPBBM conditional B.19.a.7: onCA of 154.549) 0.083, ( TablePOLITY2 onKAOPEN conditional Effect onCA B.19.a.6: of and PBBM (-10,10) POLITY2 TableKAOPEN and onPBBM Effect conditional onCA B.19.a.5: of POLITY2 PBBM PBBM Effect of GOVBAL on CA CA on GOVBAL of Effect Value of PBBM PBBM ofValue high 10 percentile 68.110 68.110 percentile high10 low 10 percentile 7.270 7.270 percentile low10 high 10 percentile 10 10 percentile high10 low 10 percentile -5.8 -5.8 percentile low10

mean 34.810 34.810 mean mean 5.935 5.935 mean low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 Low 10 percentile percentile 10 Low (0.808, 0.755) (0.808, 0.897) (0.585, (1.479, 0.769) (1.479, (0.265, 0.839) (0.265, (0.438, 0.152) (0.438, (0.285, 0.139) (0.285, (0.342, 0.089) (0.342, 259 -0.253 -0.253 -0.076 -0.054 -0.054 -1.129 0.737 2.541 2.541 0.737 -1.129 -0.634 -0.634 7.270 34.810 68.110 68.110 34.810 7.270 0.436 0.436 0.425 0.425 0.590 0.590 7.270 7.270

PBBM ( 0.083, 154.549) 154.549) 0.083, ( PBBM KAOPEN (-1.808, 2.541) (-1.808, KAOPEN (0.758, 0.383) (0.758, 0.540) (0.793, (1.878, 0.990) (1.878, (0.233, 0.562) (0.233, (0.476, 0.137) (0.476, (0.149, 0.024) (0.149, -0.665 -0.665 -0.488 (0.279, 0.182) (0.279, -0.135 -0.135 -0.715 -0.715 0.023 0.023 0.344 0.344 34.810 34.810 Mean Mean 0.376 0.376 (1.277, 0.365) (1.277, 0.501) (1.458, (2.510, 0.850) (2.510, (0.369, 0.563) (0.369, (0.598, 0.189) (0.598, (0.251, 0.295) (0.251, -1.164 -1.164 -0.987 -0.475 -0.475 -0.214 -0.214 -0.793 -0.793 High 10 percentile percentile 10 High 0.265 0.265 (0.265, 0.662) (0.265, 68.110 68.110 0.116 0.116 CEU eTD Collection (-10,10) POLITY2 onSIZE conditional KAOPEN POLITY2 Table onSAVINGS of and B.19.b.4: Effect (-10,10) POLITY2 POLITY2 onKAOPEN and SIZETable conditional of B.19.b.3: onSAVINGS Effect -0.241 -7.92 percentile low10 (-10,10) POLITY2 and onM3GDP conditional KAOPEN POLITY2 Table onSAVINGS of B.19.b.2: Effect (-10,10) POLITY2 onKAOPEN and onSAVINGS M3GDP POLITY2 Table conditional of B.19.b.1: Effect 1970-2007.B.19.a.: of equation estimation 1, base Savings sample,

high 10 percentile 10 10 percentile high10 10 percentile high10 0.876 2.275 1.722 10 percentile high10 mean 10 percentile high10 low 10 percentile -6.84 -6.84 percentile low10 -7.92 percentile low10 low 10 percentile -6.84 -6.84 percentile low10

mean 5.105 5.105 mean 5.105 mean 2.275 mean low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 (1.522, 0.874) (1.522, 19.327 49.985 91.914 91.914 49.985 percentile high10 19.327 mean percentile low10 (0.963, 0.075) (0.963, 0.291) (0.827, (0.055, 0.0.006) 0.0.006) (0.055, (0.044, 0.0.978) 0.0.978) (0.044, (0.962, 0.449) (0.962, 0.304) (0.870, 0.519) (0.042, 0.001) (0.047, (0.054, 0.097) (0.054, (0.061, 0.003) (0.061, (1.943, 0.501) (1.943, 260 31.041 114.148 246.45 246.45 114.148 31.041 -1.265 0.249 2.541 2.541 0.249 -1.265 -0.731 -0.731 -0.900 2.541 -0.001 0.498 -0,027 -1.129 -0.090 -0.090 -1.312 -1.312 0.152 0.152 0.167 0.167 0.187 0.187

KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN 2.541) (-1.808, KAOPEN M3GDP ( 0.075, 2.541) 0.075, ( M3GDP SIZE (4.949, 440.933) (4.949, SIZE (0.930, 0.364) (0.930, 0.283) (0.943, 0.301) (0.028, (0.029, 0.905) (0.029, (0.037, 0.082) (0.037, (0.034, 0.019) (0.034, (0.047, 0.050) (0.047, (2.091, 0.496) (2.091, (0.058, 0.088) (0.058, (1.602, 0.214) (1.602, -1.998 (0.635, 0.956) (0.635, -0.035 0.211) (0.703, -0.881 -0.848 -0.848 -1.943 -0.029 -0.004 -0.004 -0.092 -0.092 -1.430 -1.430 0.065 0.065 0.080 0.080 0.100 0.100 (1.937, 0.024) (1.937, -4.401 (0.729, 0.001) (0.729, -2.438 0.002) (1.038, -3.284 (1.906, 0.588) (1.906, 0.547) (1.991, 0.715) (0.017, 0.090) (0.019, (0.036, 0.069) (0.036, (0.044, 0.243) (0.044, (0.045, 0.036) (0.045, (2.863, 0.574) (2.863, (0.073, 0.665) (0.073, -1.035 -1.035 -1.204 -0.006 -0.032 -0.066 -0.066 -0.051 -0.051 -0.095 -0.095 -1.617 -1.617 -0.031 -0.031 CEU eTD Collection 2.735 -4.68 percentile low10 (-10,10) POLITY2 onPBBM conditional KAOPEN POLITY2 Table onSAVINGS of and B.19.b.6: Effect GOVBAL onKAOPEN, POLITY PBBM and conditional Table of onSAVINGS B.19.b.5: Effect

Effect of PBBM on CAon PBBM of Effect Values of KAOPEN, KAOPEN, Valuesof POLITY, GOVBAL GOVBAL POLITY,

mean 6.357 0.642 0.642 6.357 -0.048 10 percentile high10 mean

(0.113, 0.013) (0.113, percentile percentile Low 10 10 Low 0.287 0.287 (0.048, (0.048, 0.527) 0.527) (2.093, 0.195) (2.093, 8.200 35.583 71.244 71.244 35.583 percentile high10 8.200 mean percentile low10 (1.286, 0.970) (1.286, 0.592) (1.195, Mean Mean 0.030 0.030 261

(0.039, 0.019) (0.039, percentile percentile High 10 10 High PBBM (0.083, 154.549) 154.549) (0.083, PBBM -0.087 -0.087 (2.228, 0.286) (2.228, 2.395 (0.826, 0.640) (0.826, -0.388 0.743) (0.918, -0.303 KAOPEN and POLITY (high 10 10 (high POLITY and KAOPEN GOVBAL (low 10 perc.) perc.) 10 (low GOVBAL (2.953, 0.511) (2.953, 1.953 (1.554, 0.595) (1.554, -0.830 0.937) (1.754, -0.140 (0.026, 0.255) (0.026, -0.030 -0.030 perc), perc), CEU eTD Collection (-10,10) POLITY2 INVESTMENTTableKAOPEN and onSTOCK conditional Effect POLIT on B.19.c.4: of (-10,10) POLITY2 INVESTMENT on TableSTOCK and Effect POLIT onKAOPEN B.19.c.3: conditional of (-10,10) POLITY2 INVESTMENTTableKAOPEN and onM3GDP conditional Effect on B.19.c.2: POLITY of (-10,10) POLITY2 INVESTMENT and POLITY onKAOPEN conditional Table on M3GDP Effect B.19.c.1: of ofInvestmentB.19.c: equationsample, estimation 1970-2007. 1, base

high 10 percentile 10 10 percentile high10 10 percentile high10 10 percentile high10 10 percentile high10 o 0pretl -7 percentile low10 -7.92 percentile low10 o 0pretl -7 percentile low10 -7.92 percentile low10

mean 4.070 4.070 mean 4.070 mean 2.275 mean 2.275 mean low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 (0.592, 0.915) (0.592, 0.096) (0.035, 0.376) (0.592, 0.809) (0.039, (0.511, 0.906) (0.511, 0.071) (0.031, 0.973) (0.467, 0.091) (0.033, (0.031, 0.097) (0.031, 0.019) (0.049, (0.677, 0.668) (0.677, 0.307) (0.642, 262 19.327 49.985 91.914 91.914 49.985 19.327 -1.265 0.249 2.541 2.541 0.249 -1.265 -0.060 -0.060 2.541 0.526 -1.137 -0.291 -0.291 -0.657 0.063 0.063 0.059 0.525 0.009 6.207 46.630 115.426 115.426 46.630 6.207 0.057 0.016 0.056 0.052 0.052 0.117

STOCK ( 0.101, 276.739) 0.101, ( STOCK KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN 2.541) (-1.808, KAOPEN M3GDP ( 0.075, 2.541) 0.075, ( M3GDP (0.029, 0.979) (0.029, (0.510, 0.897) (0.510, 0.584) (0.344, (0.590, 0.922) (0.590, 0.170) (0.027, 0.526) (0.505, (0.022, 0.124) (0.022, 0.095) (0.027, (0.675, 0.661) (0.675, 0.120) (0.553, (0.024, 0.222) (0.024, 0.033) (0.050, -0.001 -0.001 -0.066 -0.066 -0.188 -0.297 -0.297 -0.861 0.058 0.058 0.037 0.321 0.034 0.034 0.046 0.030 0.030 0.107 (0.024, 0.502) (0.024, (0.688, 0.028) (0.688, 0.316) (0.465, (0.762, 0.068) (0.762, 0.667) (0.022, 0.944) (0.600, (0.019, 0.697) (0.019, 0.314) (0.030, (0.798, 0.029) (0.798, 0.071) (0.629, (0.024, 0.906) (0.024, 0.109) (0.057, -0.016 -0.016 -0.527 -0.527 -0.468 -1.403 -1.403 -1.758 -1.758 -1.140 0.010 0.010 0.042 0.007 0.007 0.030 0.003 0.003 0.091 Y2 Y2 Y2 2 2 2 2 CEU eTD Collection (-10,10) POLITY2 POLITY2 INVESTMENTTableKAOPEN onCREDIT and conditional Effect on B.19.c.6: of (-10,10) POLITY2 POLITY2 and onKAOPEN conditional TableCREDITINVESTMENT Effect B.19.c.5: of on

high 10 percentile 10 10 percentile high10 10 percentile high10 o 0pretl -7 percentile low10 o 0pretl -7 percentile low10

mean 2.780 2.780 mean 2.780 mean low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 (0.594, 0.372) (0.594, 0.401) (0.044, (0.493, 0.971) (0.493, 0.035) (0.045, (0.070, 0.014) (0.070, (0.696, 0.274) (0.696, 263 -1.265 0.216 2.541 2.541 0.216 -1.265 -0.018 -0.018 -0.762 -0.762 9.663 45.203 102.179 102.179 0.531 45.203 9.663 0.037 0.095 0.095 0.173 0.173

CREDIT ( 1,914, 195.186) 195.186) 1,914, ( CREDIT KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN (0.341, 0.407) (0.341, (0.454, 0.559) (0.454, 0.351) (0.028, (0.033, 0.013) (0.033, (0.620, 0.099) (0.620, (0.066, 0.015) (0.066, -0.283 -0.283 -1.027 -1.027 0.266 0.266 0.026 0.084 0.084 0.162 0.162 (0.821, 0.389) (0.821, (0.855, 0.852) (0.855, 0.568) (0.015, (0.032, 0.039) (0.032, (0.992, 0.144) (0.992, (0.070, 0.039) (0.070, -0.709 -0.709 -0.160 -0.160 -1.452 -1.452 0.009 0.009 0.066 0.066 0.145 0.145 CEU eTD Collection States, United - account Implied current 4: Figure sample base B.20: Implied current accounts, -20 -15 -10 -15 -10 -20 -20 -15 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 10 15 10 15 -5 -5 2 1995-99 1990-94 1985-89 1980-84 1975-79 -5 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 5 0 5 0 5 FITTED ACTUAL STOCK M3GDP PBBM UPPER LOWER 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04 base sample sample base 264 -15 -10 -15 -10 -15 -10 -20 -20 -20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79

10 15 10 15 10 15 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -5 -5 -5 0 5 0 5 0 5 SIZE CREDIT SMTO 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04

CEU eTD Collection

-20 -20 -15 -10 -15 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 10 15 -5 -5 0 5 0 5 OVERHEAD SMTV 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 265 UPPER LOWER 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79

-20 -15 -10 10 15 -5 0 5 MARGIN 000-04 2005-07 000-04

CEU eTD Collection sam base Japan, – account Implied current 2: Figure -20 -20 -20 -10 -10 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 20 10 20 10 20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 0 0 M3GDP STOCK PBBM 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 266 ple ple -10 -10 -10 -20 -20 -20

10 20 10 20 10 20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 0 0 UPPER LOWER SIZE SMTO CREDIT 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04

CEU eTD Collection

-20 -20 -10 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 20 10 20 0 0 OVERHEAD SMTV 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 267 -10 -20 10 20

1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 UPPER LOWER MARGIN 000-04 2005-07 000-04

CEU eTD Collection s base Germany, – account Implied current 3: Figure -15 -15 -10 -10 -15 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 10 15 10 15 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -5 -5 -5 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 5 0 5 0 5 STOCK PBBM M3GDP 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 268 ample ample -10 2 1995-99 1990-94 1985-89 1980-84 1975-79 -10 -15 -10 -15

1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 10 15 10 15 -5 -5 -5 0 5 0 5 0 5 UPPER LOWER CREDIT SMTO SIZE 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04

CEU eTD Collection

-15 -15 -10 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 10 15 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -5 -5 0 5 0 5 OVERHEAD SMTV 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 269 -10 -15

1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 -5 UPPER LOWER 0 5 MARGIN 000-04 2005-07 000-04

CEU eTD Collection sam base China, – account Implied current 4: Figure -20 -20 -20 -10 -10 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 20 30 10 20 30 10 20 30 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 0 0 M3GDP SMTV PBBM 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 FITTED ACTUAL 270 ple ple 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -10 -10 -10 -20 -20 -20 10 20 30 10 20 30 10 20 30

1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 0 0 UPPER LOWER STOCK MARGIN SMTO 000-04 2005-07 000-04 000-04 2005-07 000-04 2005-07

CEU eTD Collection

-20 -10 10 20 30 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1975-79 1980-84 0 FITTED ACTUAL OVERHEAD UPPER LOWER 000-04 000-04 2005-07 271

CEU eTD Collection

B.21: Current account regressions, developing countries FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE country FE twoways FE twoways FE twoways FE country FE twoways FE twoways RE country FE country 11.230 3.556 1.466 4.546 10.425 11.113 6.606 14.730 14.155 C (7.626, 0.143) (11.163, 0.751) (10.625, 0.891) (7.564, 0.549) (10.708, 0.339) (12.513, 0.378) (12.705, 0.605) (3.362, 0.000) (10.817, 0.195) 0.098 -0.024 -0.109 0.178 -0.464 -0.203 -0.087 -0.203 -0.218 RELYOECD (0.068, 0.152) (0.174, 0.892) (0.165, 0.512) (0.064, 0.006) (0.185, 0.018) (0.132, 0.128) (0.105, 0.409) (0.062, 0.001) (0.158, 0.170) -0.027 -0.226 -0.062 -0.215 0.536 0.015 -0.005 -0.469 0.385 POLITY2 (0.261, 0.918) (0.274, 0.412) (0.187, 0.742) (0.197, 0.277) (0.161, 0.003) (0.201, 0.940) (0.164, 0.978) (0.157, 0.003) (0.375, 0.308) 0.019 -0.065 -0.067 -0.080 0.099 5.3E-05 -0.016 -0.790 1.191 FD (0.037, 0.602) (0.038, 0.091) (0.049, 0.178 (0.046, 0.080) (0.070, 0.172) (0.017, 0.998) (0.031, 0.622) (0.234, 0.001) (0.616, 0.057) 1.162 -0.344 -0.343 0.168 1.586 -0.726 -0.107 0.227 -0.931 KAOPEN (0.963, 0.229) (1.025, 0.738) (0.946, 0.718) (0.825, 0.839) (0.969, 0.113) (0.990, 0.466) (0.870, 0.902) (0.735, 0.759) (1.548, 0.550) 0.396 0.445 0.408 0.375 0.253 0.123 0.152 0.551 0.363 GOVBAL (0.162, 0.016) (0.260, 0.092) (0.249, 0.105) (0.179, 0.037) (0.425, 0.556) (0.278, 0.661) (0.285, 0.595) (0.172, 0.002) (0.239, 0.133) -0.0003 0.049 0.049 0.078 -0.050 0.079 0.045 0.057 0.049 NFAIN (0.002, 0.913) (0.035, 0.169) (0.035, 0.157) (0.031, 0.012) (0.045, 0.278) (0.035, 0.026) (0.031, 0.144) (0.010, 0.000) (0.042, 0.254) -0.149 0.029 0.024 -0.011 -0.209 -0.078 -0.060 -0.064 -0.230 DEPR (0.074, 0.048) (0.166, 0.861) (0.157, 0.882) (0.100, 0.912) (0.171, 0.233) (0.155, 0.616) (0.159, 0.708) (0.033, 0.054) (0.153, 0.136) -0.004 0.003 0.001 0.001 -0.022 -0.002 -0.004 0.097 -0.042 POLITY2*FD (0.005, 0.454) (0.004, 0.419) (0.006, 0.804) (0.006, 0.835) (0.008, 0.012) (0.002, 0.289) (0.004, 0.360) (0.035, 0.006) (0.069, 0.545) -0.020 -0.076 -0.048 -0.030 -0.024 0.095 0.056 0.036 0.048 POLITY2*KAOPEN (0.093, 0.830) (0.147, 0.608) (0.125, 0.701) (0.085, 0.724) (0.113, 0.830) (0.087, 0.277) (0.084, 0.508) (0.037, 0.333) (0.143, 0.740) -0.022 0.007 0.008 -0.011 -0.029 0.008 -0.017 -0.087 -0.045 KAOPEN*FD (0.013, 0.083) (0.001, 0.513) (0.016, 0.603) (0.017, 0.511) (0.043, 0.513) (0.011, 0.488) (0.012, 0.168) (0.126, 0.490) (0.280, 0.873) -0.043 0.050 0.052 0.002 0.056 0.001 0.012 -0.024 -0.031 TRADEGDP (0.039, 0.270) (0.043, 0.247) (0.039, 0.188) (0.035, 0.956) (0.036, 0.135) (0.049, 0.987) (0.056, 0.826) (0.014, 0.085) (0.072, 0.664) -0.160 -0.670 -0.474 -0.331 -0.347 -0.544 -0.540 -0.567 -0.101 ECONGROWTH (0.113, 0.158) (0.322, 0.042) (0.325, 0.150) (0.194, 0.091) (0.229, 0.142) (0.365, 0.141) (0.320, 0.095) (0.220, 0.014) (0.279, 0.719) -0.021 PBBM*GOVBAL (0.012, 0.092) 5.558 OIL (1.007, 0.000) R-squared 0.715 0.851 0.849 0.778 0.892 0.824 0.821 0.561 0.859 Adjusted R-squared 0.580 0.690 0.672 0.654 0.759 0.645 0.648 0.519 0.702 Durbin-Watson stat 2.647 2.983 2.997 2.405 2.969 2.960 2.823 1.707 3.083 Sample 82 48 54 71 21 54 54 68 68 Observations 291 124 138 249 61 140 145 151 150 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1975 - 2007 1990 - 2007 1990 - 2007

272 CEU eTD Collection

B.22: Current account regressions (all countries excluding Africa) FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE country -0.652 19.988 18.703 -0.184 22.472 15.100 16.212 21.032 14.989 C (6.442, 0.920) (6.456, 0.003) (6.361, 0.004) (7.486, 0.980) (9.580, 0.022) (9.768, 0.125) (7.951, 0.044) (11.904, 0.080) (9.130, 0.104) 0.041 -0.086 -0.105 0.045 -0.162 -0.127 -0.133 -0.148 -0.116 RELYOECD (0.043, 0.336) (0.053, 0.105) (0.044, 0.019) (0.043, 0.288) (0.048, 0.001) (0.049, 0.010) (0.045, 0.004) (0.062, 0.019) (0.049, 0.019) -0.096 -0.333 -0.179 -0.137 0.546 -0.084 -0.124 -0.329 0.133 POLITY2 (0.184, 0.602) (0.178, 0.064) (0.146, 0.222) (0.196, 0.486) (0.193, 0.006) (0.224, 0.708) (0.135, 0.361) (0.337, 0.331) (0.290, 0.648) -0.027 -0.058 -0.042 -0.061 0.116 -0.001 -0.004 -0.200 1.082 M3GDP (0.034, 0.440) (0.031, 0.064) (0.042, 0.322) (0.038, 0.112) (0.072, 0.110) (0.010, 0.904) (0.035, 0.920) (0.497, 0.688) (0.569, 0.060) 0.901 0.116 -0.331 0.219 0.152 -0.738 -0.060 -1.029 -0.769 KAOPEN (0.863, 0.298) (1.002, 0.908) (0.874, 0.705) (0.715, 0.760) (0.742, 0.838) (0.884, 0.405) (0.769, 0.938) (1.072, 0.339) (0.872, 0.380) 0.259 0.329 0.181 0.354 0.650 0.139 0.116 0.362 0.346 GOVBAL (0.081, 0.002) (0.184, 0.077) (0.170, 0.288) (0.124, 0.005) (0.343, 0.062) (0.188, 0.462) (0.160, 0.469) (0.270, 0.182) (0.235, 0.144) 0.002 0.033 0.039 0.019 -0.005 0.044 0.027 0.025 0.027 NFAIN (0.001, 0.211) (0.030, 0.283) (0.027, 0.157) (0.023, 0.394) (0.020, 0.804) (0.035, 0.214) (0.026, 0.308) (0.030, 0.395) (0.035, 0.442) 0.014 -0.244 -0.273 0.062 -0.380 -0.128 -0.186 -0.172 -0.202 DEPR (0.080, 0.862) (0.079, 0.003) (0.085, 0.002) (0.086, 0.471) (0.141, 0.009) (0.110, 0.246) (0.097, 0.057) (0.177, 0.336) (0.132, 0.130) 0.000 0.005 0.007 0.001 -0.016 0.000 0.005 0.075 -0.030 POLITY2*M3GDP (0.003, 0.994) (0.002, 0.010) (0.004, 0.062) (0.005, 0.878) (0.009, 0.062) (0.002, 0.907) (0.003, 0.134) (0.074, 0.310) (0.067, 0.652) -0.096 -0.049 -0.015 -0.082 -0.149 0.055 0.044 0.014 0.089 POLITY2*KAOPEN (0.078, 0.217) (0.077, 0.532) (0.066, 0.826) (0.068, 0.231) (0.118, 0.210) (0.052, 0.295) (0.061, 0.477) (0.073, 0.850) (0.073, 0.225) -0.019 -0.002 -0.002 -0.008 0.009 0.000 -0.017 0.029 -0.092 KAOPEN*M3GDP (0.008, 0.026) (0.008, 0.804) (0.012, 0.858) (0.009, 0.401) (0.021, 0.654) (0.008, 0.981) (0.009, 0.071) (0.163, 0.859) (0.215, 0.671) 0.010 0.059 0.048 0.006 0.082 0.001 0.016 -0.031 -0.020 TRADEGDP (0.028, 0.729) (0.036, 0.105) (0.035, 0.169) (0.028, 0.829) (0.041, 0.048) (0.043, 0.987) (0.040, 0.683) (0.056, 0.583) (0.047, 0.668) -0.146 -0.232 -0.094 -0.320 -0.163 -0.231 -0.211 -0.143 -0.222 ECONGROWTH (0.167, 0.383) (0.247, 0.349) (0.230, 0.684) (0.224, 0.154) (0.272, 0.550) (0.238, 0.332) (0.247, 0.396) (0.327, 0.664) (0.281, 0.432) -0.006 PBBM*GOVBAL (0.004, 0.137) R-squared 0.826 0.860 0.846 0.808 0.874 0.823 0.826 0.849 0.847 Adjusted R-squared 0.746 0.748 0.730 0.721 0.778 0.693 0.700 0.712 0.717 Durbin-Watson stat 2.259 2.466 2.519 2.277 2.180 2.430 2.449 2.573 2.738 Sample 84 65 70 75 42 70 70 78 78 Observations 327 184 201 299 132 203 208 195 195 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1975 - 2007 1990 - 2007 1990 - 2007

273 CEU eTD Collection

B.23: Current account regressions, all countries excluding oil-exporters FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE country FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways 8.087 13.808 13.094 6,245 8.303 8.904 11.824 27.904 23.908 C (6.987, 0.248) (7.766, 0.078) (7.671, 0.091) (6.835, 0.362) (9.888, 0.404) (9.502, 0.351) (8.977, 0.190) (10.007, 0.006) (8.969, 0.009) -0.050 -0.060 -0.090 -0,026 -0.143 -0.115 -0.127 -0.175 -0.162 RELYOECD (0.037, 0.182) (0.052, 0.247) (0.044, 0.042) (0.028, 0.345) (0.048, 0.004) (0.046, 0.014) (0.049, 0.011) (0.062, 0.006) (0.054, 0.004) -0.072 -0.123 -0.029 -0,219 0.556 0.220 0.029 -0.510 0.121 POLITY2 (0.187, 0.701) (0.244, 0.615) (0.177, 0.868) (0.202, 0.278) (0.217, 0.012) (0.186, 0.239) (0.157, 0.855) (0.314, 0.108) (0.410, 0.768) 0.042 -0.064 -0.058 -0,069 0.174 0.007 -0.008 -0.600 0.548 FD (0.024, 0.079) (0.034, 0.062) (0.046, 0.208) (0.048, 0.155) (0.063, 0.007) (0.009, 0.440) (0.040, 0.831) (0.550, 0.278) (0.755, 0.470) 0.509 -0.577 -0.883 -0,215 0.155 -0.891 -0.570 -1.157 -1.129 KAOPEN (0.757, 0.502) (0.982, 0.558) (0.853, 0.303) (0.744, 0.773) (0.921, 0.867) (0.805, 0.271) (0.729, 0.436) (1.011, 0.255) (0.963, 0.244) 0.377 0.357 0.247 0,347 0.760 0.193 0.172 0.501 0.509 GOVBAL (0.129, 0.004) (0.257, 0.168) (0.252, 0.328) (0.123, 0.005) (0.350, 0.033) (0.244, 0.431) (0.230, 0.456) (0.286, 0.082) (0.275, 0.067) 0.000 0.036 0.044 0,063 0.000 0.049 0.039 0.022 0.021 NFAIN (0.002, 0.960) (0.034, 0.283) (0.032, 0.169) (0.030, 0.038) (0.022, 0.999) (0.036, 0.183) (0.031, 0.205) (0.028, 0.437) (0.030, 0.488) -0.105 -0.152 -0.182 0,000 -0.169 -0.073 -0.107 -0.256 -0.303 DEPR (0.071, 0.144) (0.099, 0.129) (0.108, 0.095) (0.081, 0.996) (0.141, 0.234) (0.094, 0.437) (0.114, 0.347) (0.142, 0.075) (0.142, 0.035) -0.002 0.003 0.004 0,003 -0.019 -0.002 0.002 0.136 0.018 POLITY2*FD (0.002, 0.486) (0.003, 0.307) (0.005, 0.442) (0.005, 0.543) (0.008, 0.022) (0.001, 0.236) (0.004, 0.692) (0.060, 0.025) (0.078, 0.820) 0.042 -0.023 0.018 0,015 -0.034 0.062 0.067 0.012 0.054 POLITY2*KAOPEN (0.065, 0.514) (0.087, 0.789) (0.072, 0.806) (0.070, 0.834) (0.126, 0.785) (0.056, 0.269) (0.065, 0.308) (0.069, 0.859) (0.075, 0.473) -0.017 0.005 0.010 -0,007 -0.013 0.004 -0.003 0.029 -0.046 KAOPEN*FD (0.008, 0.035) (0.007, 0.488) (0.013, 0.431) (0.012, 0.546) (0.023, 0.552) (0.007, 0.561) (0.012, 0.789) (0.165, 0.859) (0.237, 0.846) -0.031 0.062 0.051 0,004 0.091 0.011 0.007 -0.031 -0.034 TRADEGDP (0.035, 0.371) (0.041, 0.134) (0.041, 0.220) (0.033, 0.905) (0.044, 0.041) (0.047, 0.808) (0.046, 0.888) (0.056, 0.579) (0.060, 0.568) -0.112 -0.348 -0.187 -0,264 -0.262 -0.370 -0.278 -0.192 -0.070 ECONGROWTH (0.119, 0.347) (0.285, 0.224) (0.269, 0.490) (0.191, 0.168) (0.308, 0.398) (0.264, 0.165) (0.273, 0.311) (0.207, 0.355) (0.192, 0.717) -0.009 PBBM*GOVBAL (0.004, 0.033) R-squared 0.594 0.793 0.779 0,619 0.858 0.773 0.762 0.834 0.836 Adj. R-squared 0.429 0.629 0.615 0,446 0.750 0.607 0.592 0.686 0.690 Durbin-Watson stat 2.496 2.719 2.679 2,124 2.082 2.620 2.571 2.614 2.687 Sample 96 67 71 88 41 71 71 81 81 Observations 371 189 205 340 131 207 210 203 203 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1980 - 2007 1990 - 2007 1990 - 2007

274 CEU eTD Collection Note: standard errors and p-valuesNote: parentheses and standard i errors 7.88 percentile low10 (-8,10) POLITY2 onKAOPEN conditional onCA TableSTOCK and Effect B.24.a.3: POLITY2 of 7.88 percentile low10 (-8,10) POLITY2 TableKAOPEN onSIZE Effectand conditional onCA B.24.a.2: of POLITY2 7.88 percentile low10 (-8,10) POLITY2 of onKAOPENTableconditional SIZE 19Effect and B.24.a.1: POLITY2 onCA ofB.24.a.: equation estimation account 1,developed Current 1970-2007. countries, B.24: Interaction terms mean 8.731 8.731 10 mean percentile high10 8.731 10 mean percentile high10 8.731 10 mean percentile high10

low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (0.099, 0.317) (0.099, 0.000) (1.198, 0.020) (0.046, (0.046, 0.009) (0.046, 0.154) (0.076, 0.099) (0.857, 0.001) (0.964, 0.004) (0.039, 0.007) (0.041, 275 69.986 175.301 274.645 274.645 175.301 69.986 -0.100 -0.100 -4.606 -0.112 -0.126 -0.126 -0.110 -1.446 -3.228 2.541 -0.120 1.243 -0.115 -0.738 -0.738 1.243 2.541 2.541 1.243 -0.738

KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN 2.541) (-1.808, KAOPEN SIZE (32.339, 440.933) 440.933) (32.339, SIZE (0.078, 0.875) (0.078, 0.270) (1.425, 0.116) (0.034, (0.028, 0.178) (0.028, 0.681) (0.055, 0.270) (1.404, 0.810) (1.335, 0.004) (0.020, 0.035) (0.027, -0.012 -0.012 -1.592 -0.055 -0.038 -0.038 -0.022 -0.323 -0.062 -0.058 1.569 1.569 (0.070, 0.526) (0.070, 0.559) (2.124, (0.031, 0.563) (0.031, (0.035, 0.583) (0.035, 0.494) (0.050, 0.056) (2.148, 0.242) (2.122, (0.016, 0.133) (0.016, 0.361) (0.023, -0.018 -0.018 -0.025 -0.025 -0.021 0.045 0.045 1.252 0.019 0.019 0.035 4.412 2.520 CEU eTD Collection -0.289 CAon PBBM of Effect GOVBAL POLITY, KAOPEN, Valuesof onKAOPEN,and TablePBBM GOVBAL POLITY Effect B.24.a.7: of conditional onCA 7.88 percentile low10 (-8,10) POLITY2 TableKAOPEN onCREDIT Effectand conditional onCA B.24.a.6: of POLITY2 7.88 percentile low10 (-8,10) POLITY2 onKAOPENTableCREDIT Effect and B.24.a.5: of POLITY2 conditional onCA 7.88 percentile low10 (-8,10) POLITY2 TableKAOPEN and onSTOCK Effect conditional onCA B.24.a.4: POLITY2 of mean 8.731 8.731 10 mean percentile high10 8.731 10 mean percentile high10 8.731 10 mean percentile high10

percentile percentile (0.131, 0.034) (0.131, 10 Low Mean High 10 10 High Mean 0.045) 0.045) (0.067, -0.138 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (1.582, 0.429) (1.582, 0.493) (0.035, 0.009) (1.527, (0.772, 0.655) (0.772, 0.413) (1.083, 0.580) (0.053, 0.092) (0.880, 0.007) (1.082, (0.041, 0.949) (0.041, 276 15.432 70.933 139.235 139.235 70.933 15.432 31.485 83.615 145.668 145.668 83.615 31.485 -1.257 -1.257 -4.133 -0.347 -0.347 -0.891 2.541 -0.030 1.243 -0.738 -1.513 -3.081 0.024 0.024 0.003 0.003

CREDIT (17.929, 195.186) 195.186) (17.929, CREDIT percentile percentile (0.048, 0.774) (0.048, -0.014 KAOPEN (-1.809, 2.541) 2.541) (-1.809, KAOPEN STOCK (0.423, 276.739) 276.739) (0.423, STOCK (1.249, 0.234) (1.249, 0.480) (0.021, 0.360) (1.821, (0.847, 0.490) (0.847, 0.166) (0.811, 0.104) (0.024, 0.324) (0.941, 0.640) (1.343, (0.017, 0.699) (0.017, -1.498 -1.498 -1.684 -0.588 -0.588 -1.133 -0.039 -0.632 -0.007 -0.007 0.015 0.015 0.937 0.937 perc), perc), GOVBAL (low 10 perc.) perc.) 10 (low GOVBAL 10 (high POLITY and KAOPEN (0.033, 0.371) (0.033, 0.030 (0.035, 0.796) (0.035, 0.621) (2.674, (1.613, 0.272) (1.613, (1.909, 0.044) (1.909, 0.302) (2.282, (1.740, 0.616) (1.740, 0.342) (1.486, 0.020) (0.019, (0.026, 0.629) (0.026, -1.785 -1.785 -0.875 -0.875 -1.420 -0.045 -0.013 -0.013 0.009 0.009 1.331 3.952 3.952 2.383 CEU eTD Collection (-1.808, 2.541) (-1.808, 7.88 percentile low10 (-8,10) POLITY2 onKAOPEN conditional onCA Table SMTO and Effect B.24.a.11: POLITY2 of onPBBM Table GOVBAL Effect conditional B.24.a.10: onCA of TablePOLITY and onPBBM conditional Effect onCA B.24.a.9: KAOPEN of 7.3 percentile low10 (-8,10) POLITY2 TableKAOPEN and onPBBM Effect conditional onCA B.24.a.8: of POLITY2 KAOPEN KAOPEN

mean 8.731 8.731 10 mean percentile high10 8.641 10 mean percentile high10 Effect of PBBM on CAon PBBM of Effect Value of PBBM PBBM ofValue high 10 percentile 2.541 2.541 percentile high10 low 10 percentile -0.712 -0.712 percentile low10

mean 1.372 1.372 mean low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (2.562, 0.865) (2.562, (1.351, 0.024) (1.351, (2.327, 0.001) (2.327, low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (0.039, 0.022) (0.039, 0.334) (3.133, (0.043, 0.009) (0.043, 0.005) (0.035, 0.018) (1.315, 0.961) (1.602, Low 10 percentile percentile 10 Low 19.667 44.371 79.887 79.887 44.371 19.667 (0.418, 0.538) (0.418, 0.437 0.437 3.181 3.181 8.073 8.073 277 19.667 44.371 79.887 79.887 44.371 19.667 -0.094 -0.094 -0.119 -0.119 -0.104 -3.269 -0.079 -0.738 1.243 2.541 2.541 1.243 -0.738 3.068 3.068 19.667 19.667 0.260 0.260

PBBM (11.847, 101.383) 101.383) (11.847, PBBM KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN PBBM (11.847, 101.383) 101.383) (11.847, PBBM (2.502, 0.375) (2.502, (1.641, 0.004) (1.641, (2.894, 0.002) (2.894, (0.035, 0.655) (0.035, 0.256) (3.455, (0.019, 0.041) (0.019, 0.225) (0.021, 0.014) (0.913, 0.641) (1.785, 2.248 2.248 4.992 4.992 9.884 9.884 -0.016 -0.016 -0.041 -0.041 -0.026 -2.351 3.987 3.987 0.839 0.839 (0.292, 0.646) (0.292, 44.371 44.371 Mean Mean 0.135 0.135 (2.864, 0.099) (2.864, (2.514, 0.005) (2.514, (3.874, 0.003) (3.874, (0.042, 0.398) (0.042, 0.200) (4.071, (0.014, 0.458) (0.014, 0.340) (0.026, 0.370) (2.381, (1.065, 0.339) (1.065, 12.487 12.487 4.852 4.852 7.596 7.596 -1.031 -1.031 0.036 0.036 5.307 0.010 0.010 0.026 2.159 High 10 percentile percentile 10 High (0.203, 0.831) (0.203, 79.887 79.887 -0.044 -0.044 CEU eTD Collection mean 8.677 6.685 6.685 8.677 -0.511 10 percentile high10 mean 11.890 7.72 percentile low10 -1.283 (-8,10) POLITY2 8.677 1.038 10 percentile high10 mean POLITY2 onKAOPEN and conditional Table OVERHEAD Effect B.24.a.15: of onCA -2.962 7.72 percentile low10 (-8,10) POLITY2 POLITY2 onMARGINandTable KAOPEN Effect conditional onCA B.24.a.14: of 7.72 percentile low10 (-8,10) POLITY2 POLITY2 onKAOPEN andTable MARGIN Effect conditional onCA B.24.a.13: of 7.88 percentile low10 (-8,10) POLITY2 and onSMTO POLITY2 Table KAOPEN Effect conditional onCA B.24.a.12: of mean 8.677 8.677 10 mean percentile high10 8.731 10 mean percentile high10

MARGIN (0.836, 6.054) (0.836, MARGIN KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 percentile high10 mean percentile low10 (1.662, 0.761) (1.662, 0.005) (2.241, 0.002) (3.442, 0.510) (1.560, 0.569) (2.234, 0.323) (2.962, -0.767 1.233 2.541 2.541 1.233 percentile high10 -0.767 mean percentile low10 4.135 2.652 percentile high10 1.628 mean percentile low10 (6.267, 0.452) (6.267, 0.035) (3.343, (4.264, 0.960) (4.264, 0.064) (1.032, 0.028) (2.266, (1.946, 0.004) (1.946, 278 23.137 71.214 148.001 148.001 71.214 23.137 -4.774 -4.774 -7.295 -0.767 1.233 2.541 2.541 1.233 -0.218 -0.767 -1.962 -5.154 6.080 6.080

KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN SMTO (32.339, 440.933) 440.933) (32.339, SMTO (5.447, 0.145) (5.447, 0.084) (3.051, (3.427, 0.294) (3.427, 0.944) (0.914, 0.107) (1.980, (0.813, 0.002) (0.813, (0.588, 0.847) (0.588, 0.114 0.001) (1.945, 7.310 0.001) (3.386, 162.515 0.517) (1.044, -0.684 0.117) (1.866, -3.005 0.088) (2.666, -4.684 -8.137 -8.137 -5.397 -3.581 -3.581 -0.064 -3.257 2.718 2.718 (0.516, 0.318) (0.516, 0.523 0.001) (2.116, 7.719 0.001) (3.567, 12.924 0.001) (0.819, -3.177 0.003) (1.682, -5.498 0.007) (2.507, -7.177 (5.016, 0.047) (5.016, (2.848, 0.411) (2.848, (1.503, 0.055) (1.503, (2.927, 0.057) (2.927, 0.908) (1.944, (0.629, 0.415) (0.629, -10.336 -10.336 -2.367 -2.367 -5.780 -5.780 -0.226 2.966 2.966 0.519 0.519 CEU eTD Collection onKAOPEN, and PBBM GOVBAL POLITY Table of conditional onCA B.24.b.3: Effect -7 percentile low10 (-8,10) POLITY2 KAOPENTable onSIZEand conditional onCA of POLITY2 B.24.b.2: Effect -7 percentile low10 (-10,10) POLITY2 onKAOPEN SIZETable and of POLITY2 B.24.b.1: conditional onCA Effect 1970-2007. of equationestimation B.24.b.: 1,developingcountries, Current account excluding Afri 7.72 percentile low10 (-8,10) POLITY2 onOVERHEAD POLITY2 Table KAOPEN and 6Effect conditional onCA B.24.a.1: of Effect of PBBM on CAon PBBM of Effect Values of KAOPEN, KAOPEN, Valuesof POLITY, GOVBAL GOVBAL POLITY, mean 2.272 2.272 9 mean percentile high10 8.677 10 mean percentile high10 mean 2.272 2.272 9 mean percentile high10

Low 10 percentile Mean Mean percentile 10 Low (0.171, 0.071) (0.171, 0.324 0.324 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (1.364, 0.364) (1.364, 0.588) (2.258, (1.868, 0.605) (1.868, 0.975) (1.226, 0.005) (1.077, 0.655) (1.440, (0.061, 0.072) (0.061, (0.045, 0.978) (0.045, 0.336) (0.048, 279 (0.073, 0.532) (0.073, 24.122 71.705 145.048 145.048 71.705 24.122 -0.973 -0.973 -0.038 -3.255 -0.649 1.250 1.250 1.236 1.493 2.949 4.501 4.501 2.949 1.493 -0.112 -0.112 -1.541 0.181 2.541 2.541 0.181 -1.541 -0.001 -0.001 -0.046 0.046 0.046

OVERHEAD (0.759, 8.799) (0.759, OVERHEAD KAOPEN (-1.808, 2.541) 2.541) (-1.808, KAOPEN SIZE (4.949, 332.832) (4.949, SIZE (1.349, 0.323) (1.349, 0.437) (2.149, (1.636, 0.596) (1.636, 0.952) (1.008, 0.005) (0.942, 0.882) (1.297, (0.031, 0.001) (0.031, (0.019, 0.053) (0.019, (0.027, 0.740) (0.027, -0.874 -0.874 -2.801 -0.194 1.349 1.349 1.691 0.061 0.061 -0.104 -0.104 -0.038 -0.038 0.009 0.009 (0.104, 0.129) (0.104, percentile percentile High 10 10 High -0.164 -0.164 (1.619, 0.358) (1.619, 0.370) (2.394, (1.063, 0.842) (1.063, 0.865) (1.698, (1.514, 0.636) (1.514, 0.129) (1.489, (0.029, 0.001) (0.029, (0.019, 0.048) (0.019, (0.028, 0.727) (0.028, -0.722 -0.722 -2.316 1.502 1.502 2.176 0.213 0.213 0.291 -0.103 -0.103 -0.038 -0.038 -0.010 -0.010 (high 10 perc), perc), 10 (high KAOPEN and and KAOPEN (0.137, 0.428) (0.137, (low 10 perc.) perc.) 10 (low GOVBAL GOVBAL POLITY POLITY -0.111 -0.111 ca, CEU eTD Collection (-1.908, 2.541) (-1.908, POLITY2 and onPBBMTable conditional onCA KAOPEN of B.24.b.5: Effect -7 percentile low10 (-8,10) POLITY2 KAOPEN andTable onPBBM conditional onCA of POLITY2 B.24.b.4: Effect KAOPEN KAOPEN

mean 2.568 2.568 9 mean percentile high10 high 10 percentile 2.313 2.313 percentile high10 low 10 percentile -1.618 -1.618 percentile low10

mean 0.021 0.021 mean low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (0.298, 0.283) (0.298, 0.002) (0.157, (0.256, 0.013) (0.256, low 10 percentile mean high 10 percentile percentile high10 mean percentile low10 (1.390, 0.153) (1.390, (1.209, 0.624) (1.209, 0.204) (0.907, 0.0535 0.0535 0.327 0.327 0.683 0.683 280 2.9 23.819 42.927 42.927 23.819 2.9 2.050 2.050 0.601 0.601 1.184 2.9 23.819 42.927 42.927 23.819 2.9

PBBM (0.083, 130.535) 130.535) (0.083, PBBM PBBM (0.083, 130.535) 130.535) (0.083, PBBM (0.128, 0.704) (0.128, (0.223, 0.384) (0.223, (0302, 0.605) (0302, (1.591, 0.293) (1.591, (0.694, 0.709) (0.694, 0.234) (0.692, -0.158 -0.158 0.049 0.049 0.197 0.197 1.711 1.711 0.263 0.263 0.845 (0.391, 0.137) (0.391, (0.262, 0.145) (0.262, (0.308, 0.432) (0.308, (2.060, 0.503) (2.060, (1.153, 0.646) (1.153, (0.868, 0.958) (0.868, -0.602 -0.602 -0.395 -0.395 -0.246 -0.246 -0.046 -0.046 1.402 1.402 0.536 0.536 CEU eTD Collection (developed USA - account Implied current 5: Figure country 1by equation groups. estimationB.25: Implied of current accounts, -20 -20 -15 -10 -15 -10 -15 -10 -20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 10 10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -5 -5 -5 1975-79 1980-84 1985-89 1990-94 1995-99 1990-94 2 1985-89 1980-84 1975-79 0 5 0 5 0 5 STOCK M3GDP PBBM 000-04 2005-07 000-04 2005-07 000-04 2005-07 000-04 FITTED ACTUAL 281 sample) sample) 1975-79 1980-84 1985-89 1990-94 1995-99 1990-94 1985-892 1980-84 1975-79 -20 -15 -10 -15 -10 -15 -10 -20 -20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 10 10

-5 -5 -5 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 5 0 5 0 5 UPPER LOWER CREDIT SIZE SMTO 000-04 2005-07 000-04 000-04 2005-07 000-04 2005-07

CEU eTD Collection

1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -20 -20 -15 -10 -15 -10 10 10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-941985-89 1980-841975-79 -5 -5 0 5 0 5 FITTED ACTUAL OVERHEAD SMTV UPPER LOWER 000-04 2005-07 000-04 000-04 2005-07 000-04 282 -20 -15 -10 10

-5 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-991990-94 1985-891980-84 1975-79 0 5 MARGIN 000-04 2005-07 000-04

CEU eTD Collection (develope Japan - account Implied current 6: Figure -15 -15 -15 -10 -10 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-841975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-991990-94 1985-891980-84 1975-79 10 15 20 10 15 20 10 15 20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -5 -5 -5 0 5 0 5 0 5 STOCK M3GDP PBBM 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 283 d sample) sample) d -10 -10 -10 -15 -15 -15

1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-941985-89 1980-841975-79 2 1995-991990-94 1985-891980-84 1975-79 10 15 20 2 1995-99 1990-94 1985-89 1980-84 1975-79 10 15 20 10 15 20 -5 -5 -5 0 5 0 5 0 5 UPPER LOWER FITTED ACTUAL CREDIT SIZE SMTO UPPER LOWER 000-04 2005-07 000-04 2005-07 000-04 000-04 2005-07 000-04

CEU eTD Collection

-12 -15 -10 10 15 20 12 -8 -4 -5 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 4 8 0 5 OVERHEAD SMTV 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 284 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79

-10 -15 10 15 20 -5 0 5 UPPER LOWER MARGIN 000-04 2005-07 000-04

CEU eTD Collection (develo Germany - account Implied current 7: Figure 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 12 12 12 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -8 -8 -8 -4 -4 -4 0 4 8 0 4 8 0 4 8 STOCK M3GDP PBBM 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 285 ped sample) sample) ped 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79

12 12 12 -8 -4 -4 -4 -8 -8 0 4 8 0 4 8 0 4 8 UPPER LOWER SMTO CREDIT SIZE 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04

CEU eTD Collection

12 12 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 -8 -8 -4 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 -4 0 4 8 0 4 8 OVERHEAD SMTV 000-04 000-04 2005-07 000-04 000-04 2005-07 FITTED ACTUAL 286 1975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2

12 -4 -8 0 4 8 UPPER LOWER MARGIN 000-04 000-04 2005-07

CEU eTD Collection (developi China - account Implied current 8: Figure 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 -20 -20 -20 -10 -10 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-991990-94 1985-89 1980-841975-79 10 20 10 20 10 20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 0 0 M3GDP PBBM SMTV 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04 FITTED ACTUAL 287 ng w/o Africa sample) sample) Africa w/o ng -20 -10 -10 -10 -20 -20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-991990-94 1985-89 1980-841975-79 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79

10 20 10 20 10 20 1975-79 1980-84 1985-89 1990-94 1995-99 2 1995-99 1990-94 1985-89 1980-84 1975-79 0 0 0 UPPER LOWER MARGIN STOCK SMTO 000-04 2005-07 000-04 000-04 2005-07 000-04 000-04 2005-07 000-04

CEU eTD Collection

-20 -10 1975-79 1980-84 1985-89 1990-94 1995-99 2 1990-94 1995-99 1980-84 1985-89 1975-79 10 20 0 FITTED ACTUAL OVERHEAD UPPER LOWER 000-04 2005-07 000-04 288

CEU eTD Collection

B.26: Sensitivity analysis (CAGDP less than –10 0r greater than 10 excluded from the sample) Table B.26.1: Current account regressions (sensitivity analysis) FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE country FE country FE country FE twoways FE twoways FE country FE country FE twoways FE country 0.308 12.329 5.403 2.535 6.162 -2.331 1.007 11.264 6.220 C (4.484, 0.945) (8.748, 0.162) (8.085, 0.506) (4.824, 0.600) (9.622, 0.524) (8.914, 0.794) (7.796, 0.897) (10.159, 0.271) (9.078, 0.495) -0.032 -0.051 -0.065 -0.007 -0.119 -0.066 -0.064 -0.115 -0.087 RELYOECD (0.028, 0.260) (0.038, 0.180) (0.040, 0.105) (0.026, 0.795) (0.044, 0.009) (0.035, 0.065) (0.036, 0.080) (0.046, 0.016) (0.041, 0.035) 0.044 -0.220 0.066 -0.120 0.599 0.145 0.094 -0.191 0.027 POLITY2 (0.142, 0.759) (0.257, 0.394) (0.178, 0.713) (0.188, 0.525) (0.232, 0.012) (0.219, 0.509) (0.167, 0.573) (0.318, 0.550) (0.311, 0.931) 0.042 -0.071 -0.026 -0.045 0.199 0.008 0.007 -0.521 -0.020 M3GDP (0.019, 0.033) (0.029, 0.018) (0.050, 0.600) (0.043, 0.292) (0.073, 0.008) (0.010, 0.446) (0.026, 0.797) (0.459, 0.260) (0.531, 0.970) 0.117 -0.829 -1.600 -0.377 0.314 -0.591 -0.872 -0.932 -0.975 KAOPEN (0.604, 0.847) (0.635, 0.195) (0.626, 0.012) (0.583, 0.519) (0.985, 0.751) (0.521, 0.259) (0.480, 0.072) (0.848, 0.275) (0.826, 0.241) 0.180 0.071 -0.035 0.204 0.814 -0.035 0.010 0.298 0.191 GOVBAL (0.127, 0.157) (0.256, 0.783) (0.236, 0.883) (0.132, 0.125) (0.328, 0.015) (0.215, 0.871) (0.234, 0.966) (0.245, 0.228) (0.226, 0.400) -0.002 0.005 0.003 0.003 0.001 -0.005 0.000 0.001 -0.006 NFAIN (0.016, 0.896) (0.029, 0.872) (0.023, 0.912) (0.015, 0.843) (0.021, 0.977) (0.027, 0.866) (0.025, 0.987) (0.025, 0.962) (0.029, 0.835) -0.061 -0.196 -0.139 -0.022 -0.151 -0.040 -0.080 -0.131 -0.101 DEPR (0.047, 0.196) (0.087, 0.026) (0.084, 0.098) (0.059, 0.712) (0.144, 0.297) (0.087, 0.645) (0.078, 0.309) (0.132, 0.322) (0.099, 0.311) -0.001 0.004 -0.001 0.001 -0.021 -0.001 -0.003 0.076 0.033 POLITY2*M3GDP (0.002, 0.533) (0.003, 0.151) (0.005, 0.825) (0.005, 0.762) (0.009, 0.030) (0.002, 0.596) (0.003, 0.337) (0.050, 0.133) (0.065, 0.612) 0.053 0.019 0.061 0.049 -0.052 0.071 0.083 0.020 0.050 POLITY2*KAOPEN (0.042, 0.213) (0.074, 0.793) (0.061, 0.316) (0.045, 0.279) (0.136, 0.702) (0.051, 0.166) (0.051, 0.107) (0.069, 0.775) (0.072, 0.488) -0.014 0.008 0.022 -0.008 -0.004 -0.002 0.010 0.114 0.081 KAOPEN*M3GDP (0.008, 0.086) (0.007, 0.200) (0.009, 0.016) (0.009, 0.423) (0.022, 0.858) (0.005, 0.619) (0.011, 0.380) (0.119, 0.342) (0.148, 0.583) 0.027 0.077 0.064 0.031 0.079 0.072 0.064 0.038 0.027 TRADEGDP (0.021, 0.198) (0.033, 0.022) (0.030, 0.035) (0.022, 0.157) (0.047, 0.098) (0.030, 0.019) (0.027, 0.021) (0.050, 0.447) (0.042, 0.513) -0.019 -0.037 0.196 -0.250 -0.257 0.154 0.169 -0.009 -0.024 ECONGROWTH (0.091, 0.837) (0.271, 0.892) (0.224, 0.384) (0.172, 0.148) (0.278, 0.358) (0.234, 0.512) (0.217, 0.438) (0.326, 0.977) (0.292, 0.935) -0.008 PBBM*GOVBAL (0.003, 0.017) R-squared 0.628 0.740 0.742 0.685 0.806 0.722 0.726 0.764 0.751 Adjusted R-squared 0.483 0.567 0.578 0.546 0.667 0.546 0.557 0.563 0.553 Durbin-Watson stat 1.937 2.288 2.241 1.882 1.987 2.181 2.223 2.516 2.492 Sample 69 51 56 62 36 56 56 63 63 Observations 285 156 173 263 123 174 176 168 168 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1980 - 2007 1980 - 2007 1990 - 2007 1990 - 2007

289 CEU eTD Collection

Table B.26.2: Savings regressions (sensitivity analysis) FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways RE country FE country FE twoways FE country FE country FE country FE country FE twoways 18.071 23.772 22.446 22.558 24.061 20.824 1.007 34.489 44.384 C (7.802, 0.022) (5.024, 0.000) (8.845, 0.013) (7.178, 0.002) (13.986, 0.090) (9.954, 0.039) (7.796, 0.897) (9.251, 0.000) (10.041, 0.000) 0.072 0.015 0.022 0.061 -0.036 0.040 -0.064 0.004 -0.031 RELYOECD (0.035, 0.042) (0.018, 0.415) (0.046, 0.627) (0.032, 0.062) (0.038, 0.349) (0.039, 0.318) (0.036, 0.080) (0.036, 0.920) (0.038, 0.426) 0.050 0.038 0.266 0.215 0.815 0.212 0.094 0.119 -0.203 POLITY2 (0.175, 0.774) (0.244, 0.878) (0.203, 0.194) (0.264, 0.416) (0.305, 0.009) (0.252, 0.402) (0.167, 0.573) (0.481, 0.806) (0.458, 0.659) 0.080 0.013 0.067 0.041 0.162 0.008 0.007 -0.435 -1.219 M3GDP (0.032, 0.014) (0.030, 0.664) (0.038, 0.078) (0.069, 0.550) (0.067, 0.019) (0.013, 0.514) (0.026, 0.797) (0.447, 0.334) (0.388, 0.002) 0.689 -1.099 -1.169 -0.878 0.751 -0.660 -0.872 -0.904 -0.581 KAOPEN (0.995, 0.489) (0.648, 0.092) (0.765, 0.130) (0.924, 0.343) (1.332, 0.575) (0.940, 0.484) (0.480, 0.072) (1.966, 0.647) (1.975, 0.770) 0.301 0.048 0.040 0.251 0.691 0.125 0.010 0.488 0.576 GOVBAL (0.153, 0.051) (0.180, 0.790) (0.340, 0.908) (0.157, 0.112) (0.242, 0.006) (0.329, 0.704) (0.234, 0.966) (0.241, 0.046) (0.250, 0.024) -0.010 0.030 0.021 -0.012 0.014 0.018 0.000 0.010 0.002 NFAIN (0.021, 0.648) (0.019, 0.115) (0.021, 0.303) (0.021, 0.554) (0.024, 0.574) (0.027, 0.502) (0.025, 0.987) (0.025, 0.700) (0.025, 0.944) -0.101 -0.108 -0.094 -0.136 -0.081 -0.088 -0.080 -0.190 -0.300 DEPR (0.071, 0.153) (0.051, 0.034) (0.079, 0.238) (0.071, 0.057) (0.215, 0.707) (0.093, 0.346) (0.078, 0.309) (0.168, 0.261) (0.161, 0.065) 0.000 -0.001 -0.007 -0.006 -0.024 0.000 -0.003 0.022 0.112 POLITY2*M3GDP (0.003, 0.941) (0.004, 0.842) (0.006, 0.187) (0.008, 0.498) (0.008, 0.003) (0.002, 0.824) (0.003, 0.337) (0.058, 0.698) (0.063, 0.081) POLITY2*KAOPE 0.152 -0.009 -0.033 0.048 -0.144 -0.052 0.083 -0.103 -0.165 N (0.101, 0.136) (0.054, 0.873) (0.065, 0.612) (0.085, 0.568) (0.184, 0.436) (0.086, 0.547) (0.051, 0.107) (0.153, 0.501) (0.150, 0.274) -0.048 0.004 0.014 -0.002 0.001 0.000 0.010 0.178 0.246 KAOPEN*M3GDP (0.017, 0.005) (0.008, 0.602) (0.013, 0.277) (0.017, 0.930) (0.033, 0.983) (0.006, 0.948) (0.011, 0.380) (0.135, 0.191) (0.186, 0.192) 0.023 0.005 0.002 0.029 -0.004 0.023 0.064 -0.018 -0.007 TRADEGDP (0.043, 0.600) (0.015, 0.716) (0.039, 0.969) (0.036, 0.430) (0.036, 0.902) (0.039, 0.557) (0.027, 0.021) (0.038, 0.650) (0.051, 0.889) 0.207 0.766 0.823 0.280 0.675 0.848 0.169 0.606 0.547 ECONGROWTH (0.149, 0.166) (0.255, 0.003) (0.335, 0.016) (0.186, 0.134) (0.249, 0.009) (0.362, 0.021) (0.217, 0.438) (0.191, 0.002) (0.250, 0.032) -8.265 USADUM (2.063, 0.000) 6.597 OIL (3.521, 0.063) -0.008 PBBM*GOVBAL (0.004, 0.038) R-squared 0.879 0.375 0.910 0.831 0.932 0.900 0.726 0.921 0.928 Adjusted R-squared 0.824 0.306 0.850 0.757 0.886 0.836 0.557 0.854 0.861 Durbin-Watson stat 1.476 1.378 2.225 1.315 1.830 2.138 2.223 2.444 2.413 Sample 65 48 51 59 35 50 56 57 57 Observations 268 142 155 254 116 156 176 150 149 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1975 - 2007 1980 - 2007 1990 - 2007 1990 - 2007

290 CEU eTD Collection

Table B.26.3: Investment regressions (sensitivity analysis) FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE twoways FE country FE twoways FE country FE twoways FE country FE twoways FE country 18.774 13.012 16.644 16.497 26.949 20.884 1.007 21.005 26.066 C (7.390, 0.012) (5.468, 0.020) (5.971, 0.006) (6.010, 0.007) (7.714, 0.001) (6.028, 0.001) (7.796, 0.897) (7.571, 0.007) (7.117, 0.000) 0.048 0.055 0.084 0.038 0.032 0.109 -0.064 0.108 0.077 RELYOECD (0.033, 0.145) (0.036, 0.126) (0.030, 0.007) (0.030, 0.213) (0.034, 0.346) (0.027, 0.000) (0.036, 0.080) (0.030, 0.001) (0.032, 0.019) 0.387 0.036 -0.015 0.571 0.100 -0.141 0.094 -0.086 -0.139 POLITY2 (0.184, 0.037) (0.156, 0.820) (0.097, 0.877) (0.169, 0.001) (0.157, 0.525) (0.113, 0.217) (0.167, 0.573) (0.254, 0.735) (0.231, 0.550) 0.046 0.070 0.051 0.128 -0.005 -0.002 0.007 -0.040 -0.636 M3GDP (0.038, 0.234) (0.036, 0.058) (0.028, 0.069) (0.048, 0.009) (0.055, 0.931) (0.006, 0.782) (0.026, 0.797) (0.464, 0.931) (0.572, 0.269) -0.489 -0.374 0.188 -0.933 1.322 -0.438 -0.872 -0.408 -0.793 KAOPEN (0.792, 0.538) (0.734, 0.612) (0.586, 0.749) (0.695, 0.181) (0.562, 0.021) (0.492, 0.375) (0.480, 0.072) (0.593, 0.493) (0.622, 0.206) 0.129 0.046 0.242 0.054 0.210 0.187 0.010 0.266 0.294 GOVBAL (0.134, 0.339) (0.157, 0.771) (0.198, 0.224) (0.135, 0.687) (0.346, 0.545) (0.171, 0.278) (0.234, 0.966) (0.183, 0.150) (0.196, 0.136) 0.003 0.020 0.019 0.004 0.013 0.018 0.000 0.014 0.013 NFAIN (0.016, 0.872) (0.008, 0.013) (0.011, 0.094) (0.016, 0.774) (0.012, 0.285) (0.011, 0.110) (0.025, 0.987) (0.014, 0.297) (0.013, 0.330) -0.050 0.043 0.052 -0.060 -0.080 -0.042 -0.080 -0.030 -0.035 DEPR (0.072, 0.485) (0.064, 0.504) (0.052, 0.317) (0.055, 0.282) (0.125, 0.525) (0.064, 0.515) (0.078, 0.309) (0.109, 0.783) (0.087, 0.687) -0.006 -0.003 -0.002 -0.013 -0.006 0.001 -0.003 -0.004 0.012 POLITY2*M3GDP (0.004, 0.087) (0.003, 0.286) (0.003, 0.462) (0.005, 0.004) (0.008, 0.458) (0.001, 0.161) (0.003, 0.337) (0.056, 0.939) (0.066, 0.856) POLITY2*KAOPE -0.011 0.066 -0.024 0.003 -0.170 -0.028 0.083 -0.041 -0.088 N (0.055, 0.844) (0.071, 0.357) (0.043, 0.578) (0.060, 0.959) (0.080, 0.037) (0.035, 0.436) (0.051, 0.107) (0.042, 0.328) (0.047, 0.067) 0.002 -0.007 -0.018 0.012 -0.003 0.000 0.010 0.077 0.199 KAOPEN*M3GDP (0.012, 0.837) (0.007, 0.357) (0.011, 0.104) (0.012, 0.338) (0.017, 0.847) (0.004, 0.982) (0.011, 0.380) (0.093, 0.407) (0.107, 0.065) 0.024 -0.036 -0.029 0.011 -0.036 -0.013 0.064 -0.013 -0.029 TRADEGDP (0.029, 0.416) (0.044, 0.422) (0.036, 0.417) (0.028, 0.710) (0.039, 0.355) (0.035, 0.713) (0.027, 0.021) (0.061, 0.831) (0.052, 0.581) 0.397 0.804 0.600 0.658 0.798 0.649 0.169 0.463 0.566 ECONGROWTH (0.186, 0.034) (0.276, 0.005) (0.198, 0.003) (0.106, 0.000) (0.222, 0.001) (0.254, 0.012) (0.217, 0.438) (0.246, 0.063) (0.217, 0.011) -0.003 PBBM*GOVBAL (0.005, 0.505) R-squared 0.789 0.901 0.893 0.779 0.915 0.901 0.726 0.903 0.898 Adjusted R-squared 0.707 0.827 0.826 0.693 0.860 0.831 0.557 0.822 0.817 Durbin-Watson stat 1.348 2.354 2.283 1.437 2.120 2.324 2.223 2.342 2.384 Sample 69 51 56 62 36 56 56 63 63 Observations 311 157 174 286 124 176 176 170 169 Time span 1970 - 2007 1980 - 2007 1980 - 2007 1970 - 2007 1990 - 2007 1975 - 2007 1980 - 2007 1990 - 2007 1990 - 2007

291 CEU eTD Collection

B.27: Current account regressions at yearly frequency, 1970-2007 FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE country FE country FE twoways FE country FE country FE twoways FE country FE country 5.589 39.651 37.801 14.561 34.299 38.974 37.496 46.360 43.652 C (4.238, 0.187) (13.802, 0.004) (12.839, 0.003) (6.873, 0.034) (16.788, 0.042) (12.782, 0.002) (13.484, 0.006) (14.048, 0.001) (12.972, 0.001) -0.035 -0.037 -0.047 -0.018 -0.069 -0.053 -0.062 -0.072 -0.071 RELYOECD (0.018, 0.052) (0.028, 0.187) (0.027, 0.086) (0.019, 0.359) (0.035, 0.051) (0.029, 0.072) (0.033, 0.055) (0.036, 0.048) (0.035, 0.044) -0.211 -0.168 -0.101 -0.205 0.511 -0.131 -0.082 -0.036 0.184 POLITY2 (0.229, 0.357) (0.141, 0.232) (0.128, 0.432) (0.282, 0.468) (0.221, 0.021) (0.166, 0.428) (0.121, 0.499) (0.216, 0.866) (0.244, 0.452) 0.051 -0.052 -0.042 0.024 0.111 -0.009 -0.014 -0.033 0.283 M3GDP (0.022, 0.021) (0.013, 0.000) (0.035, 0.229) (0.037, 0.505) (0.032, 0.001) (0.006, 0.146) (0.021, 0.523) (0.206, 0.873) (0.279, 0.310) 1.376 -1.634 -1.355 0.358 -3.226 -1.175 -1.024 -1.063 -1.543 KAOPEN (0.785, 0.080) (0.784, 0.037) (0.720, 0.060) (0.771, 0.643) (1.331, 0.016) (0.676, 0.083) (0.672, 0.128) (1.142, 0.352) (1.139, 0.176) 0.014 0.153 0.126 0.161 0.381 0.109 0.102 0.227 0.213 GOVBAL (0.065, 0.829) (0.086, 0.076) (0.090, 0.162) (0.069, 0.019) (0.155, 0.014) (0.080, 0.176) (0.079, 0.192) (0.113, 0.046) (0.110, 0.053) 0.012 0.059 0.065 0.066 0.046 0.063 0.059 0.057 0.057 NFA (0.006, 0.044) (0.019, 0.002) (0.016, 0.000) (0.013, 0.000) (0.024, 0.058) (0.019, 0.001) (0.019, 0.002) (0.013, 0.000) (0.013, 0.000) -0.096 -0.256 -0.232 -0.003 -0.177 -0.173 -0.187 -0.251 -0.257 DEPR (0.070, 0.168) (0.068, 0.000) (0.067, 0.001) (0.061, 0.957) (0.129, 0.173) (0.070, 0.013) (0.069, 0.007) (0.097, 0.010) (0.094, 0.007) -0.003 0.002 0.001 -0.005 -0.006 -0.002 -0.003 0.019 -0.008 POLITY2*M3GDP (0.002, 0.214) (0.002, 0.165) (0.004, 0.778) (0.004, 0.151) (0.005, 0.295) (0.001, 0.112) (0.002, 0.234) (0.028, 0.492) (0.032, 0.812) -0.035 0.107 0.109 -0.016 0.424 0.117 0.094 0.136 0.178 POLITY2*KAOPEN (0.072, 0.628) (0.081, 0.184) (0.073, 0.136) (0.080, 0.843) (0.136, 0.002) (0.076, 0.123) (0.072, 0.191) (0.090, 0.132) (0.098, 0.068) -0.017 0.007 0.012 -0.004 -0.028 0.009 0.016 -0.028 -0.014 KAOPEN*M3GDP (0.006, 0.008) (0.005, 0.159) (0.008, 0.130) (0.009, 0.633) (0.012, 0.017) (0.005, 0.101) (0.007, 0.016) (0.063, 0.652) (0.077, 0.858) 0.023 0.068 0.053 0.012 0.036 0.032 0.036 -0.003 -0.007 TRADEGDP (0.017, 0.180) (0.026, 0.008) (0.027, 0.048) (0.020, 0.531) (0.025, 0.153) (0.018, 0.079) (0.021, 0.093) (0.026, 0.903) (0.026, 0.790) -0.019 -0.204 -0.167 -0.121 -0.189 -0.165 -0.195 -0.091 -0.090 ECONGROWTH (0.059, 0.753) (0.113, 0.072) (0.097, 0.087) (0.063, 0.053) (0.120, 0.114) (0.080, 0.041) (0.106, 0.068) (0.074, 0.218) (0.080, 0.261) -0.330 -4.876 -4.955 -2.189 -6.003 -5.582 -5.171 -5.929 -5.664 LAGLNREER (0.451, 0.464) (3.031, 0.108) (2.856, 0.083) (1.787, 0.221) (4.051, 0.139) (2.839, 0.050) (3.000, 0.085) (3.210, 0.065) (2.986, 0.058) -0.006 PBBM*GOVBAL (0.003, 0.017) R-squared 0.544 0.707 0.699 0.472 0.769 0.681 0.697 0.766 0.764 Adj. R-squared 0.502 0.680 0.671 0.422 0.746 0.652 0.656 0.743 0.741 Durbin-Watson stat 1.109 0.924 0.917 1.202 0.817 0.916 0.897 0.884 0.911 Sample 63 50 52 60 34 52 52 61 61 Observations 1288 720 761 1200 532 780 788 827 829 Time span 1975 to 2007 1978 to 2007 1978 to 2007 1975 to 2007 1990 to 2007 1977 to 2007 1976 to 2007 1987 to 2007 1987 to 2007

292 CEU eTD Collection

B.28: Current account regressions, between model FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD -2.904 -0.792 -1.454 -0.544 -2.408 -0.262 -0.684 3.606 4.687 (Intercept) (2.479, 0.244) (3.061, 0.797) (3.386, 0.669) (2.700, 0.841) (3.532, 0.501) (3.551, 0.941) (3.206, 0.832) (3.601, 0.319) (3.503, 0.184) 0.038 0.030 0.027 0.036 0.074 0.042 0.029 0.036 0.029 RELYoecd (0.015, 0.012) (0.018, 0.109) (0.020, 0.175) (0.019, 0.058) (0.021, 0.001) (0.019, 0.032) (0.018, 0.116) (0.024, 0.135) (0.021, 0.180) 0.320 -0.059 0.126 0.168 -0.455 -0.007 0.035 -0.215 -0.303 polity2 (0.120, 0.009) (0.128, 0.647) (0.110, 0.256) (0.124, 0.177) (0.221, 0.049) (0.118, 0.955) (0.103, 0.739) (0.249, 0.392) (0.205, 0.143) 0.060 0.017 0.070 0.070 -0.068 0.012 0.083 -0.260 -0.598 m3gdp (0.015, 0.000) (0.013, 0.186) (0.020, 0.001) (0.024, 0.005) (0.073, 0.354) (0.010, 0.260) (0.030, 0.007) (0.274, 0.346) (0.252, 0.020) -1.424 0.015 -1.581 -1.222 -0.310 -0.472 -0.500 -1.818 -1.883 kaopen (0.564, 0.013) (0.553, 0.978) (0.441, 0.001) (0.494, 0.015) (0.811, 0.706) (0.461, 0.310) (0.406, 0.222) (0.981, 0.067) (0.841, 0.028) 0.610 0.493 0.480 0.633 0.511 0.533 0.493 0.394 0.409 govbal (0.111, 0.000) (0.106, 0.000) (0.119, 0.000) (0.117, 0.000) (0.290, 0.090) (0.123, 0.000) (0.115, 0.000) (0.128, 0.003) (0.125, 0.001) 0.038 0.058 0.041 0.030 0.043 0.058 0.047 0.043 0.043 NFA (0.007, 0.000) (0.008, 0.000) (0.008, 0.000) (0.007, 0.000) (0.013, 0.002) (0.009, 0.000) (0.009, 0.000) (0.008, 0.000) (0.008, 0.000) 0.024 0.044 0.034 0.016 0.083 0.030 0.034 -0.005 -0.001 depr (0.024, 0.314) (0.031, 0.163) (0.034, 0.319) (0.026, 0.546) (0.050, 0.107) (0.035, 0.398) (0.032, 0.287) (0.035, 0.880) (0.033, 0.982) -0.006 -0.001 -0.007 -0.008 0.004 -0.002 -0.008 0.018 0.047 m3gdp:polity2 (0.002, 0.002) (0.001, 0.484) (0.002, 0.001) (0.003, 0.012) (0.009, 0.658) (0.002, 0.232) (0.003, 0.006) (0.043, 0.676) (0.041, 0.247) -0.026 -0.055 0.088 -0.033 -0.134 -0.042 -0.022 0.036 0.054 polity2:kaopen (0.046, 0.572) (0.067, 0.411) (0.058, 0.136) (0.057, 0.560) (0.083, 0.119) (0.056, 0.449) (0.053, 0.681) (0.068, 0.594) (0.066, 0.416) 0.011 0.000 0.008 0.015 0.014 0.002 0.006 0.121 0.124 m3gdp:kaopen (0.010, 0.260) (0.004, 0.997) (0.007, 0.286) (0.010, 0.132) (0.023, 0.561) (0.007, 0.804) (0.013, 0.622) (0.149, 0.418) (0.152, 0.416) -0.003 -0.011 -0.023 -0.006 0.008 -0.004 -0.014 0.011 0.013 tradegdp (0.007, 0.670) (0.009, 0.218) (0.010, 0.018) (0.008, 0.434) (0.011, 0.478) (0.008, 0.640) (0.009, 0.117) (0.010, 0.248) (0.010, 0.184) -0.489 -0.325 -0.127 -0.703 -0.003 -0.239 -0.252 -0.604 -0.648 econgrowth (0.175, 0.006) (0.198, 0.106) (0.222, 0.570) (0.206, 0.001) (0.329, 0.993) (0.236, 0.314) (0.219, 0.253) (0.279, 0.033) (0.270, 0.019) -0.006 govbal:pbbm (0.003, 0.079) 3.633 3.252 2.394 3.495 6.933 2.278 3.068 3.379 3.154 Oil (1.190, 0.003) (1.338, 0.018) (1.499, 0.115) (1.251, 0.007) (1.700, 0.000) (1.512, 0.137) (1.412, 0.033) (1.735, 0.055) (1.692, 0.066) -2.782 -5.202 -5.963 -4.467 -4.878 -4.109 -6.168 -3.491 -2.958 USA dummy (3.179, 0.384) (2.955, 0.083) (3.404, 0.084) (3.242, 0.172) (2.174, 0.033) (3.372, 0.227) (3.320, 0.068) (4.549, 0.445) (4.375, 0.501) R-squared 0.808 0.826 0.742 0.778 0.897 0.764 0.793 0.622 0.638 Sample 107 79 85 99 43 82 82 101 101 Observations 2302 1124 1206 2093 669 1226 1235 1255 1258 Time span 1973-2008 1980-2008 1980-2008 1970-2008 1993-2008 1983-2008 1983-2008 1990-2008 1990-2008

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B.29: Current account regressions, XCONST as the proxy of institutional quality FD proxy M3GDP SIZE STOCK CREDIT PBBM SMTO SMTV MARGIN OVERHEAD Model FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE twoways FE country 3.238 14.748 15.896 4.053 5.090 12.191 14.401 25.323 9.871 C (7.724, 0.675) (7.808, 0.062) (7.110, 0.027) (7.727, 0.600) (10.363, 0.625) (9.076, 0.182) (7.557, 0.059) (13.401, 0.061) (10.711, 0.359) 0.042 -0.062 -0.095 0.048 -0.158 -0.124 -0.122 -0.158 -0.116 RELYOECD (0.046, 0.363) (0.053, 0.248) (0.045, 0.034) (0.043, 0.263) (0.047, 0.001) (0.048, 0.011) (0.044, 0.007) (0.059, 0.009) (0.047, 0.015) -0.373 -0.120 -0.115 -0.628 2.243 0.285 -0.006 0.105 1.455 XCONST (0.570, 0.513) (0.576, 0.836) (0.416, 0.783) (0.631, 0.321) (0.622, 0.001) (0.614, 0.643) (0.390, 0.988) (1.280, 0.935) (1.131, 0.201) -0.020 -0.067 -0.104 -0.115 0.539 0.010 -0.053 -0.858 2.059 M3GDP (0.072, 0.784) (0.058, 0.255) (0.075, 0.171) (0.094, 0.223) (0.167, 0.002) (0.023, 0.669) (0.055, 0.338) (1.268, 0.500) (1.300, 0.116) 2.056 -0.215 -0.723 0.949 2.502 -1.413 -0.911 -0.459 -1.495 KAOPEN (1.496, 0.171) (1.542, 0.890) (1.321, 0.585) (1.503, 0.529) (1.890, 0.190) (1.111, 0.206) (1.232, 0.461) (1.826, 0.802) (1.667, 0.372) 0.265 0.377 0.259 0.407 0.614 0.179 0.157 0.512 0.411 GOVBAL (0.099, 0.008) (0.203, 0.066) (0.192, 0.180) (0.134, 0.003) (0.351, 0.084) (0.204, 0.380) (0.191, 0.412) (0.241, 0.036) (0.205, 0.047) 0.002 0.037 0.042 0.054 -0.007 0.049 0.036 0.035 0.035 NFAIN (0.002, 0.478) (0.032, 0.246) (0.029, 0.142) (0.021, 0.011) (0.019, 0.700) (0.034, 0.154) (0.028, 0.198) (0.029, 0.236) (0.033, 0.299) -0.022 -0.161 -0.216 0.053 -0.261 -0.118 -0.157 -0.269 -0.236 DEPR (0.085, 0.793) (0.082, 0.054) (0.087, 0.015) (0.082, 0.518) (0.151, 0.088) (0.088, 0.182) (0.084, 0.063) (0.162, 0.099) (0.117, 0.047) 0.002 0.006 0.015 0.009 -0.085 -0.002 0.012 0.167 -0.185 XCONST*M3GDP (0.011, 0.832) (0.008, 0.476) (0.012, 0.238) (0.015, 0.531) (0.028, 0.003) (0.005, 0.732) (0.009, 0.201) (0.224, 0.459) (0.216, 0.393) -0.136 -0.029 0.025 -0.123 -0.528 0.193 0.175 -0.092 0.196 XCONST*KAOPEN (0.252, 0.591) (0.279, 0.917) (0.222, 0.911) (0.258, 0.634) (0.396, 0.186) (0.184, 0.297) (0.215, 0.419) (0.317, 0.772) (0.306, 0.523) -0.027 0.001 0.004 -0.011 0.006 0.000 -0.011 0.071 -0.052 KAOPEN*M3GDP (0.008, 0.001) (0.007, 0.905) (0.012, 0.716) (0.010, 0.291) (0.025, 0.815) (0.007, 0.975) (0.011, 0.338) (0.149, 0.637) (0.202, 0.798) -0.008 0.047 0.046 0.008 0.088 0.001 0.009 -0.028 -0.029 TRADEGDP (0.033, 0.815) (0.036, 0.188) (0.035, 0.188) (0.031, 0.806) (0.041, 0.037) (0.042, 0.978) (0.042, 0.825) (0.056, 0.621) (0.046, 0.531) -0.249 -0.326 -0.177 -0.502 -0.134 -0.313 -0.294 -0.237 -0.238 ECONGROWTH (0.150, 0.098) (0.262, 0.216) (0.243, 0.469) (0.220, 0.023) (0.279, 0.632) (0.248, 0.209) (0.257, 0.255) (0.321, 0.461) (0.252, 0.347) -0.007 PBBM*GOVBAL (0.004, 0.091) R-squared 0.780 0.833 0.823 0.779 0.875 0.812 0.810 0.853 0.851 Adjusted R-squared 0.677 0.706 0.696 0.674 0.778 0.680 0.679 0.724 0.729 Durbin-Watson stat 2.030 2.764 2.723 2.249 2.127 2.608 2.621 2.698 2.816 Sample 104 68 73 94 43 73 73 86 85 Observations 384 196 213 349 134 216 221 215 214 Time span 1970-2007 1980-2007 1980-2007 1970-2007 1990-2007 1980-2007 1975-2007 1990-2007 1990-2007

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XVI, no. I: XVI, 168-178. no. Mntr Hsoy f h United the of History Monetary A 39, no. 3: 383–439.39, no.3: During the 19th Century and Century 19th the During Oxford Economic PapersEconomic Oxford . Baltimore: John Hopkins John Baltimore: . The Economic History History Economic The Miracle, the Crisis, and Crisis, the Miracle, al tet journal Street Wall American Economic Economic American ing the Nineteenth Nineteenth the ing . Harcourt Brace Harcourt . ect Investment: ect h Bagdad the American American 106, no. 4: no. 106, Oxford: . . Paris: Paris: . , , CEU eTD Collection Relations, 1958-1971Relations, oda, on . ad oi W Puy 19. Te boec o Cptl Controls Capital of Obsolence “The 1993. Pauly. W. Louis Economic an Management in Global Age Markets.” of and B., John Goodman, http://www.nber.org/papers/w11562.pdf?new_window=1. Fe Accessed Research. Economic of Bureau National 11562, Paper Working Disi Volcker Incredible “The 2005. King. Robert and Marvin, Goodfriend, 873. Uncertainty.” Demand I and Direct Variability “Foreign Rate 1995. Kolstad. D. Charles and A., Linda Goldberg, ral, ai, n Ls xe. 98 “ tl o to oiin: compari dominions: two of tale “A 1998. Oxley. 1870.” since Canada and Les Australia of records macroeconomic and David, Greasly, States 1991. Krugman. R. Paul and M., Edward Graham, AApproach.” Modern Theory Portfolio Overseas Investment “British 2006. Ukhov. Andrey and N., William Goetzmann, Pr Country-Specific versus “Global andAccount.”Shocks the Current 1995. Rogoff. Kenneth and Reuven, Glick, http://www.frbsf.org/publications/economics/p 32bk.pdf. 2009. March 10 Accessed Reserve Federal 2008-32, Paper Working China.” in Policy Monetary Flow Glick, Reuven, the Trilemma: and Hutchison. Capital 2008.“Navigating Michael Robert. 1975. Gilpin, Essays.of 1966. Alexander. Gerschenkron, Galbraith, John Kenneth.Galbraith, 1980. John 1-113.no. 2: 2008. 15, December Asia.” East from Insights and Evidence Crises: Accessed Radel Steven and Bosworth, P. Barry Stiglitz, Research. E Joseph Jason, Furman, Economic of Bureau http://www.nber.org/papers/w3737.pdf?new_window=1. National 3737, W NBER Investment.” Direct Foreign “Japanese 1991. A. Kenneth Froot, 294-318.no. 2: ai, rni J 2007. J. Francis Gavin, . Washington D.C.: Institute Economics.International . Washington D.C.: for Cambridge,Press. 2ndimpression. Harvard University Mass.: . The University Press. of North Carolina U.S. Power and the Multinational CorporationU.S. Power andthe Multinational od Dlas ad oe: h Pltc o Itrainl Monetary International of Politics The Power: and Dollars, Gold, The Great Crash, 1929The Great Crash, Economic Backwardness in Historical Perspective. A Book Book A Perspective. Historical in Backwardness Economic Journal of MonetaryJournal of Economics Review of Finance of Review 309 nentoa Eooi review Economic International Brookings Papers on Economic Activity Economic on Papers Brookings

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The The 31 CEU eTD Collection Debating China’s Exchange Rate PolicyRate Exchange China’s Debating Development na%20and%20Japan%20Feb%202009.pdf. http://web.pdx.edu/~ito/Hiro%20Ito%20US%20Current%20Acct%20Deficit%20wi Accessed July 3,2009. China with then, Japan with I Economic “Asian conferencethe for prepared PaperDraft).” Debate Account Current “U.S. 2009. Hiro. Ito, International Fund. Monetary Wahsington, D. C.: intertemporalempirical framework.” the analysis in cur the and disturbances permanent and “Transitory 1999. Ferdaus. Hossain, In End.” It Rotemberg, Bernanke Press. and Julio Cambridge: MIT 129-201. Will How and From W Crisis: Banking Japanese “The 1999. Kashyap. Anil and Takeo, Hoshi, Franc and The History ReviewBusiness Co. & Morgan P. J. War: at Bank Private “A 2000. Martin. Horn, Huntigton, Samuel P. 1988. “The U.S.: Decline or Renewal?” Renewal?” or Decline U.S.: “The 1988. P. Samuel Huntigton, http://www.clevelandfed.org/research/trends/2008/0208/01intmar.cfm. AccessedReserveBank1, 2009. Cleveland. September of Renminb the Inflationand “Chinese 2008. Shenk. Michaeland F., OwenHumpage, International for PeterInstitute Economics. G. Peterson219-238. Washington D.C.: Chi the and Congress US “The 2008. Brunel. Claire and Clyde, Hufbauer, stakes rising tide, 2006. Sheth. Ketki and Wong, Yee Clyde, Gary Hufbauer, International Fund. Monetary 1997. Khan. S. Mohsin and Zuliu, Hu, International Monetary Fund. 2003. Fund. Monetary International http://www.ifsl.org.uk/upload/CBS_Sovereign%20Wealth%20Funds%202009.pdf. August 2009. Acc 2009.” Funds Wealth “Sovereign 2009. London. Services Financial International Ingham, Geoffrey. 1984. 1984. Geoffrey. Ingham, InternationalInternational IFSF Financial – Statistics. Monetary 2009. http://dspace.mit.edu/handle/1721.1/27375. Technology of Institute Massachusetts diss., PhD Investment.” Foreign Firms National of Operations International “The 1960. Stephen. Hymer, 76:96. . Basingstoke, Hampshire: Macmillan. Hampshire:. Basingstoke, Macmillan. . Washington, D.C.: Institute. Washington,International for Economics. D.C.: Capitalism Divided? The City and Industry in British Social Social British in Industry and City The Divided? Capitalism 74, no. 1: 85-112. 74, no.1: External Debt Statistics. Guide for Compilers and Usersand Compilers for Guide Statistics. Debt External BR areoois nul 1999 Annual Macroeconomics NBER Why is China Growing so Fast? so Growing China is Why , edited by Morris Goldstein and Nicholas R. Lardy, R. Nicholas and Goldstein Morris by edited , 312

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