The USA in World Integration
Edited by Thomas L. Brewer and Gavin Boyd
Chapter 7: The United States and global capital markets
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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