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

Lee Ohanian (), Paulina Restrepo-Echavarria, Diana Van Patten and Mark Wright

No 2020-042, Working Papers from Federal Reserve Bank of St. Louis

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

Keywords: Bretton Woods; capital flows; capital controls; business cycle accounting (search for similar items in EconPapers)
JEL-codes: E21 E65 F21 F33 F38 F41 J20 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2020-10-21, Revised 2023-09-15
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-his, nep-mac, nep-mon and nep-opm
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DOI: 10.20955/wp.2020.042

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Handle: RePEc:fip:fedlwp:88995