Exchange Controls and the Segmentation of International Currency Markets
Fall 2023
The aim of my project is to measure the effect of currency controls on bilateral trade and capital flows. Currency controls are restrictions on the purchase or sale of foreign (domestic) currency by residents (non-residents). The first step of the project is to identify currency controls. Using a new hand-collected dataset of end-of-month exchange rates quoted in 17 national financial centers (i.e., countries) between 1900 and 2020, I check for violations of the Law of One Price in international currency markets. Absent controls on international currency flows, the price of any currency against any other currency should be the same in every financial center. My first results reveal that: (i) currency markets were well integrated except during the Bretton Woods period (i.e., 1950s and 1960s), and (ii) during the Bretton Woods period, controls on currency flows split the world into two distinct zones: a Dollar zone (including the US and Canada) and a non-Dollar zone. The next step of the project will be to use the integration of the Dollar and non-Dollar zones in the late 1950s and 1960s as a natural experiment to measure the effect of currency controls on bilateral trade and capital flows.