Over the past century, the world economy has passed through a succession
of phases characterized by very different levels of internstionsl capital
flows. This paper asks whar accounrs for these dramatic shifts in the extent
of capital aovements across national borders, Three categories of
explanation are considered. The first emphasizes the policy regime,
attributing the unusual extent of capital flows prior ro 1914 to the
operation of the international gold standard. The second focuses on the
stages-of-indehtedness sometimes thought to characterize the process of
economic development. The third ascribes changes in the extent of capital
flows to the boom-and-bust cycles through which international capital markets
are thought to pass. Though each approach conrrihutes something to our
understanding of the phenomenon, none is totally satisfactory. I therefore
suggest an alternative explanation, which lays stress on the increase in the
magnitude of real interest rate and reel exchange race variability char has
occurred over the last 100 years.
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