This paper reviews the theoretical functions, history, and policy problems raised by the international capital market. The goal is to offer a perspective on both the considerable advantages the market offers and on the genuine hazards it poses, as well as on the avenues through which it constrains national policy choices. A duality of benefits and risks is inescapable in the real world of asymmetric information and imperfect contract enforcement. I argue, however, that in confronting the global capital market there is no reason to depart from conventional economic wisdom. The way to maximize net benefits is to encourage economic integration while attacking concomitant distortions and other unwanted side-effects at, or close to, their sources.

First draft. Preliminary. Please do not cite or circulate without authors ’ permission. Recently, the political economy of macroeconomic policy choice has increasingly been guided by the simple prescriptions of the classic trilemma. For example, policymakers often speak of the hollowing out of exchange rate regimes in a world of unstoppable capital mobility; and policy autonomy and a fixed nominal anchor present an unpleasant dichotomy for emerging markets beset by the fear of floating. Yet the trilemma is not an uncontroversial maxim, and its empirical foundations deserve greater attention. Some authors (e.g., Calvo and Reinhart 2001, 2002) have argued that under the modern float there could be limited policy autonomy given the rapid international transmission of interest rate shocks; others (e.g., Bordo and Flandreau 2003) that even under the classical gold standard there actually was considerable policy autonomy given the gold point spread and the use of gold devices and other tricks. Such arguments turn the trilemma on its head. Resolving this debate is ultimately an empirical matter, where the broadest span of data should be scrutinized. Using new techniques to study the coherence of international interest

This paper brings together two strands of the economic literature-- that on the finance-growth nexus and that on capital market integration-- and explores key issues surrounding each strand through both institutional/country histories and formal quantitative analysis. We begin

A revision of the paper presented at the NBER Globalization in Historical Perspective conference

This paper discusses the benefits and risks that financial globalization entails for developing countries. Financial globalization can lead to large benefits, particularly to the development of the financial system. But financial globalization can also come with crises and contagion. The net effect of financial globalization is likely positive in the long run, with risks being more prevalent right after countries liberalize. So far, only some countries, sectors, and firms have taken advantage of globalization. As financial systems turn global, governments lose policy instruments, so there is an increasing scope for some form of international financial policy cooperation.

Hatton, Kevin O’Rourke, and especially Peter Lindert. I am grateful to all five. I also acknowledge with pleasure financial support from the National Science Foundation SES-0001362. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

s of the 1990s were made after the peg collapsed and to bail out investors and lenders who would otherwise have suffered from the fall of the exchange rate. These bailouts have been justified on the ground that they will prevent contagion spreading to other countries. The size factor is a reflection of the growth of international capital flows to the affected countries provided by banks and nonbank financial institutions of the industrialized world. The term of the loans they arranged is an indication that the troubled countries were not only illiquid. They were also insolvent. The success of the rescues is in question. In what follows I give an overview of historical experience, discuss the lessons from history and consider the case for a possible solution to the problem of international liquidity crises, making the International Monetary Fund an international lender of last resort. 1 1 This discussion draws upon Bordo and Schwartz (1998). Michael D. Bordo

Paper to be presented to the Conference on the Political Economy of Globalization, Trinity College,

100-91 JAPANNOTE: IMES Discussion Paper Series is circulated in order to stimulate discussion and comments. Views expressed in Discussion Paper Series are those of authors and do not necessarily reflect those of the Bank of Japan or the

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