Capital controls and recovery from the financial crisis of the 1930s

• Published in: Journal of international economics 2015-03, Vol.95 (2), p.188-201
• Main Authors: Mitchener, Kris James, Wandschneider, Kirsten
• Format: Article
• Language: English
• Subjects: Capital controls; Economic conditions; Economic crisis; Economic forecasts; Economic recovery; Federal Reserve monetary policy; Financial crises; Financial crisis; Gold markets; Great Depression; International economics; Interwar gold standard; Macroeconomics; Monetary policy; Studies; U.S.A
• ISSN: 0022-1996; 1873-0353
• DOI: 10.1016/j.jinteco.2014.11.011

We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in-differences (DD) estimates of industrial production, prices, and exports suggest that capital controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy. •We examine the first widespread use of capital controls in response to a financial crisis.•We analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression.•We find evidence that they stemmed gold outflows in the year following their imposition.•However, we find industrial production, prices, and exports did not better relative to countries that went off gold and floated.•Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold.•Countries imposing capital controls appear to have refrained from fully utilizing their newly acquired monetary policy autonomy.