Paper #552

Title:

Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999

Author:

Hans Joachim Voth

Date:

May 2001

Abstract:

For most of the post-war period, Europe’s capital markets remained largely closed to international capital flows. This paper explores the costs of this policy. Using an event-study methodology, I examine the extent to which restrictions of current and capital account convertibility affected stock returns. The delayed introduction of full currency convertibility increased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapse of the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mounting evidence suggesting that capital account liberalization facilitates growth.

Keywords:

Cost of capital, liberalization, current account, capital account, convertibility

JEL codes:

F21, G15

Area of Research:

Economic and Business History

Published in:

International Journal of Finance & Economics, 8 (2003), 3, pp. 255-276

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