Globalizing America

Globalizing America

The USA in World Integration

New Horizons in International Business series

Edited by Thomas L. Brewer and Gavin Boyd

The authors address questions in current business and policy literature regarding the structural linkages evolving in the globalization process. The authors conclude that the US administration and American firms have to be more responsive to the interests of the international community that are being vitally affected by the integrating effects of transnational production and world trade.

Chapter 7: The United States and global capital markets

Joseph P. Daniels

Subjects: business and management, international business

Extract

Joseph P. Daniels INTRODUCTION During the Bretton Woods period, central banks were responsible for maintaining pegged exchange values thereby reducing exchange rate risk and currency arbitrage opportunities. The existence of significant capital controls made sovereign governments and international agencies the primary source of official development financing. The ad hoc system of flexible exchange rates that emerged in 1973 through 1976 resulted in a transfer of exchange rate risk, and arbitrage opportunities, from government agencies to the private sector. The dismantling of capital controls and deregulation of domestic financial sectors signalled a willingness of governments to substitute private sector financing for official financing by domestic governments and international agencies. Liberalization of capital markets, along with increased international transactions in the real sector, have spurred dramatic growth in the international money and capital markets. (See Williamson and Mahar (1998) for an excellent essay on financial liberalization.) Daily foreign exchange transactions, for example, have grown to nearly $1.4 trillion. This growth highlights the importance of today’s capital markets in allocating savings worldwide. By channelling savings to borrowers, capital market institutions help finance domestic investment and direct savings, whether it be domestically and globally, to their most efficient use, allowing savers to achieve higher risk adjusted rates of return. Access to global capital markets allows borrowers to pursue investment projects in times of domestic downturns, thus reducing domestic business cycles (Eichengreen et al., 1999). In light of recent financial crises, however, many observers have come to question the benefits...

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