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

RePEc Short ID: pre260
ORCID iD: 0000-0002-1481-051X

Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Van Patten, Diana; Wright, Mark L. J.

doi:10.20955/wp.2020.042

Working Paper Revision

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

Abstract: This paper quantifies the positive and normative impacts of Bretton Woods capital controls on global economic activity. It applies a three-region DSGE model consisting of the U.S., Western Europe, and the Rest of the World (ROW) to measure de facto capital controls and analyze their effects. Counterfactual analyses show Bretton Woods controls significantly prevented ROW capital from flowing to the U.S., had large negative welfare effects on the U.S., raised welfare in the ROW, and increased global output. Why did the U.S. support controls, given lower welfare? By keeping capital in the ROW, we find controls promoted key U.S. foreign policy objectives. U.S. officials anticipated capital would flow into the U.S. after the war, which they feared could dangerously destabilize ally countries at a time of global political tensions. We interpret controls as an international stabilization tool highly valued by the U.S.

Keywords: Bretton Woods; capital flows; capital controls; business cycle accounting;

JEL Classification: E21; E65; F21; F33; F38; F41; J20;

https://doi.org/10.20955/wp.2020.042