Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-13T03:43:52.100Z Has data issue: false hasContentIssue false
  • English
  • Français

Invested interests: the politics of national economic policies in a world of global finance

Published online by Cambridge University Press:  22 May 2009

Jeffry A. Frieden
Jeffry A. Frieden
Affiliation:
Associate Professor of Political Science at the University of California, Los Angeles.
Get access

Abstract

Capital moves more rapidly across national borders now than it has in at least fifty years and perhaps in history. This article examines the effects of capital mobility on different groups in national societies and on the politics of economic policymaking. It begins by emphasizing that while financial markets are highly integrated within the developed world, many investments are still quite specific with respect to firm, sector, or location. It then argues that contemporary levels of international capital mobility have a differential impact on socioeconomic groups. Over the long run, increased capital mobility tends to favor owners of capital over other groups. In the shorter run, owners and workers in specific sectors in capital-exporting countries bear much of the burden of adjusting to increased capital mobility. These patterns can be expected to lead to political divisions about whether or not to encourage or increase international capital market integration. The article then demonstrates that capital mobility also affects the politics of other economic policies. Most centrally, it shifts debate toward the exchange rate as an intermediate or ultimate policy instrument. In this context, it tends to pit groups that favor exchange rate stability against groups that are more concerned about national monetary policy autonomy and therefore less concerned about exchange rate stability. Similarly, it tends to drive a wedge between groups that favor an appreciated exchange rate and groups that favor a depreciated one. These divisions have important implications for such economic policies as European monetary and currency union, the dollar-yen exchange rate, and international macroeconomic policy coordination.

Type
Articles
Information
International Organization , Volume 45 , Issue 4 , Autumn 1991 , pp. 425 - 451
Copyright
Copyright © The IO Foundation 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

I am grateful to the Social Science Research Council, the German Marshall Fund, the UCLA Academic Senate Committee on Research, and the UCLA International Studies and Overseas Programs for their financial support. I also thank Benjamin J. Cohen, Barry Eichengreen, Judith Goldstein, Joanne Gowa, Robert Keohane, Stephen Krasner, David Lake, Edward Learner, Timothy McKeown, Louis Pauly, Frances Rosenbluth, John Ruggie, and Michael Wallerstein for their helpful comments and suggestions.

1. For prominent examples from each of these issue-areas, see Milner, Helen V., Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton, N.J.: Princeton University Press, 1988)Google Scholar; Evans, Peter, Dependent Development: The Alliance of Multinational, State, and Local Capital in Brazil (Princeton, N.J.: Princeton University Press, 1979)Google Scholar; Becker, David G. et al. , Postimperialism: International Capitalism and Development in the Late Twentieth Century (Boulder, Colo.: Lynne Rienner, 1987)Google Scholar; Kaufman, Robert and Stallings, Barbara, eds., Debt and Development in Latin America (Boulder, Colo.: Westview Press, 1989)Google Scholar; Cohen, Benjamin J., In Whose Interest? International Banking and American Foreign Policy (New Haven, Conn.: Yale University Press, 1987)Google Scholar; and Lipson, Charles, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries (Berkeley: University of California Press, 1985)Google Scholar. The bodies of literature, of course, are far too large to cite or discuss here.

2. The two quintessential works on this subject are Gourevitch's, PeterPolitics in Hard Times: Comparative Responses to International Economic Crises (Ithaca, N.Y.: Cornell University Press, 1986)Google Scholar and Rogowski's, RonaldCommerce and Coalitions: How Trade Affects Domestic Political Alignments (Princeton, N.J.: Princeton University Press, 1989)Google Scholar.

3. Sachs, Jeffrey and Wyplosz, Charles, “The Economic Consequences of President Mitterand,” Economic Policy 2 (04 1986), pp. 262–322Google Scholar.

4. See Freeman, John, “Banking on Democracy? International Finance and the Possibilities for Popular Sovereignty,” mimeograph, University of Minnesota, 1990Google Scholar. From a politically different quarter, former Citibank chief executive officer Walter Wriston has said similar things about the impact of financial internationalization—but approvingly: “It's a new world and the concept of sovereignty is going to change.… The idea of fifteenth-century international law is gone. It hasn't laid down yet, but it's dead. It's like the three-mile limit in a world of Inter-Continental Ballistic Missiles.” Wriston is cited in my Banking on the World: The Politics of American International Finance (New York: Harper & Row, 1987), p. 115Google Scholar. See also Wriston, Walter, Risk and Other Four-Letter Words (New York: Harper & Row, 1986)Google Scholar.

5. Bank for International Settlements (BIS), Sixtieth Annual Report (BIS: Basle, 1990), pp. 63, 82, and 125Google Scholar.

6. See Goldstein, Morris, Mathieson, Donald, and Lane, Timothy, “Determinants and Systemic Consequences of International Capital Flows,” in Determinants and Systemic Consequences of International Capital Flows (Washington, D.C.: International Monetary Fund, 1991), p. 5Google Scholar. This assumes a low level of international bond lending in 1973, which is almost certainly the case. Exact figures are not available.

7. See BIS, Sixtieth Annual Report, pp. 208–9Google Scholar. See also pp. 146–52, which offer data regarding some short-term instruments and indicate that open positions in interest rate futures and options totaled about $1.6 trillion at the end of 1989.

8. The early classic work was Feldstein, M. and Horioka's, C. “Domestic Savings and International Capital Flows,” Economic Journal 90 (06 1980), pp. 314–29CrossRefGoogle Scholar. For more on the issue and debates over it, see Bryant, Ralph, International Financial Intermediation (Washington, D.C.: Brookings Institution, 1987), pp. 82–86Google Scholar. For a recent test, see Bayoumi, Tamim, “Saving-Investment Correlations: Immobile Capital, Government Policy, or Endogenous Behavior?” IMF Staff Papers 37 (06 1990), pp. 360–87CrossRefGoogle Scholar.

9. The most careful assessment of the Feldstein-Horioka findings, updated through the late 1980s, emphasizes the great increase in capital mobility and the continued importance of currency premiums. See Frankel, Jeffrey A., “Quantifying International Capital Mobility in the 1980s,” in Bernheim, Douglas and Shoven, John, eds., National Saving and Economic Performance (Chicago: University of Chicago Press, 1991), pp. 227–60Google Scholar.

10. For rough evidence on intranational and international stock price differentials, see Eichengreen, Barry, “Is Europe an Optimum Currency Area?” mimeograph, University of California at Berkeley, 1990, pp. 6–9Google Scholar. The differentials may have to do with nontransferable advantages accruing to national owners, such as greater access to information or to monitoring and enforcement mechanisms.

11. The modern theory of foreign direct investment is based on the proposition that multinational firms exist precisely because they facilitate (but do not make costless) the international transmission of such specific assets. The classic statement by Caves is still probably the most appropriate here. See Caves, Richard E., “International Corporations: The Industrial Economics of Foreign Investment,” Economica 38 (02 1971), pp. 1–27CrossRefGoogle Scholar.

12. This is a conclusion made by Frankel in “Quantifying International Capital Mobility in the 1980s.” One indication of the high degree to which markets for financial assets are integrated is the virtual disappearance of significant spreads between domestic and offshore interest rates in most currency instruments of members of the Organization for Economic Cooperation and Development (OECD). Regarding this subject, see Goldstein, , Mathieson, , and Lane, , “Determinants and Systemic Consequences of International Capital Flows,” pp. 7–11Google Scholar.

13. Although I am unaware of any studies of this phenomenon, arguments to this effect are frequently heard among American competitors of the Japanese transplants, often in the context of complaints over the Japanese firms' access to low-cost Japanese funds. There are reasons to doubt the accuracy of the argument, however. First, most foreign direct investment is funded in the host country. Second, if Japanese firms have privileged access to Japanese finance, then financial markets are not fully integrated. The result might be due to preferential ties among Japanese financial and nonfinancial firms, which would constitute a “natural” barrier to financial capital mobility. Further study in this regard is required. A related issue is the effect of foreign-owned branch plants on political lineups in the host country. For anecdotal evidence that Japanese investment in the United States has created or reinforced domestic interest groups that favor freer trade, see “Influx of Foreign Capital Mutes Debate on Trade,” The New York Times, 8 February 1987, p. 113.

14. See the following works of Mundell, Robert A.: “The Appropriate Use of Monetary and Fiscal Policy Under Fixed Exchange Rates,” IMF Staff Papers 9 (03 1962), pp. 70–77CrossRefGoogle Scholar; “Capital Mobility and Stabilization Policy Under Fixed and Flexible Exchange Rates,” Canadian Journal of Economics and Political Science 29 (11 1963), pp. 475–85CrossRefGoogle Scholar; and “A Reply: Capital Mobility and Size,” Canadian Journal of Economics and Political Science 30 (08 1964), pp. 421–31CrossRefGoogle Scholar. The basic model can be found in any good textbook discussion of open-economy macroeconomics; a useful survey is Corden's, W. M.Inflation, Exchange Rates, and the World Economy, 3d ed. (Chicago: University of Chicago Press, 1986)Google Scholar.

15. The argument presented here is in simplified form. Variation in monetary autonomy is actually along a continuum, not dichotomous: the choice is not starkly between full monetary independence and none at all; it is instead among different degrees of autonomy.

16. This ignores the potential contravening effects of the depreciation on national income; that is, it assumes that substitution effects dominate income effects or that expenditure switching dominates expenditure reduction.

17. The point is not that foreigners buy all the government bonds but, rather, that the increased domestic demand for credit is met by an increased supply of credit as capital flows in, with the result that the price of credit remains unchanged. This of course assumes that the deficit country is not large enough to affect world interest rates, which may not always be the case. It also assumes that the government does not engage in monetary policies that accommodate the fiscal expansion.

18. For a good survey and evaluation, see Hutchison, Michael M. and Pigott, Charles A., “Real and Financial Linkages in the Macroeconomic Response to Budget Deficits: An Empirical Investigation,” in Arndt, Sven and Richardson, J. David, eds., Real-Financial Linkages Among Open Economies (Cambridge, Mass.: MIT Press, 1987), pp. 139–66Google Scholar.

19. More accurately, it does not affect the covered interest rate—that is, the interest rate minus (or plus) the market's expectation of currency movements. Obviously, if investors expect a currency to fall, they demand a higher interest rate for securities denominated in it, and vice versa. Covered interest parity appears to have held well from the mid-1970s onward among almost all major currencies.

20. For an illuminating discussion of cross-border effects, see Mussa, Michael, “Macroeconomic Interdependence and the Exchange Rate Regime,” in Dornbusch, Rudiger and Frenkel, Jacob, eds., International Economic Policy: Theory and Evidence (Baltimore, Md.: Johns Hopkins University Press, 1979), pp. 160–204Google Scholar.

21. American tax reform in 1986, for example, was followed by widespread OECD movement toward the new American corporate tax rates. By 1989, direct corporate tax rates in the principal EC member countries were all in the 35 to 42 percent range. See Waterhouse, Price, Tax: Strategic Corporate Tax Planning (London: Mercury Books, 1989)Google Scholar. Across industries, there is evidence that such footloose sectors as finance face lower effective tax rates. In the United States in 1983, for example, while twenty-four nonfinancial industries paid an average effective federal income tax rate of 17.5 percent, the three financial sectors (insurance, investment, and financial services companies) paid an average of 8.5 percent. See “New Threat to Smokestack America,” The New York Times, 26 May 1985, p. 3:1.

22. Rogowski, Commerce and Coalitions.

23. The classic statement is Magee's, Stephen “Three Simple Tests of the Stolper-Samuelson Theorem,” in Oppenheimer, Peter, ed., Issues in International Economics (London: Oriel, 1980), pp. 138–53Google Scholar. In Commerce and Coalitions, pp. 16–20, Rogowski addresses these objections and more; needless to say, I am unconvinced by his treatment. Benjamin J. Cohen has pointed out to me that this simple transfer of the Heckscher-Ohlin approach from trade to capital movements ignores the inherent differences between the two realms and especially the importance of expectations in determining asset prices (and therefore capital movements). This may be another reason to avoid a straightforward application of the approach to capital movements.

24. The seminal modern statement is Jones's, Ronald W. “A Three-Factor Model in Theory, Trade, and History,” in Bhagwati, Jagdish et al. , eds., Trade, Balance of Payments, and Growth (Amsterdam: North-Holland, 1971), pp. 3–21Google Scholar. Two other important articles, which essentially argue for combining specific factors in the short run with the Heckscher-Ohlin approach in the long run, are Mayer's, Wolfgang “Short-Run and Long-Run Equilibrium for a Small Open Economy,”, Journal of Political Economy 82 (09 1974), pp. 955–68CrossRefGoogle Scholar, and Mussa's, Michael “Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run,” Journal of Political Economy 82 (11 1974), pp. 1191–1204CrossRefGoogle Scholar. Based on these two articles, the approach is sometimes known as the Mayer-Mussa framework. For a useful summary and geometric representation of the short-term and long-term adjustment processes, along with a critique of the Heckscher-Ohlin assumption of intersectoral capital mobility, see Neary, J. Peter, “Short-Run Capital Specificity and the Pure Theory of International Trade,” The Economic Journal 88 (09 1978), pp. 488–510CrossRefGoogle Scholar.

25. In a slight variation on the usual specific-factors or Ricardo-Viner model, the one presented here implies that there are both mobile and specific forms of both labor and capital. The effect of relative price movements and changes in endowments thus depends in part on the potential substitutability of the forms of factors or the factors themselves—for example, substitutability of mobile for specific labor or of mobile labor for mobile capital. For our purposes, it is sufficient to stop with the simpler version. Adding complexity to the model does not fundamentally change the analytic points; it only changes the details of their empirical application.

26. I refer here to those Marxist (and non-Marxist) views that assume labor-capital contradictions to be the principal axis of political conflict. Many other Marxists focus on intraclass differences or blocs; for a good example of relevance to the issue at hand, see Gill, Stephen R. and Law, David, “Global Hegemony and the Structural Power of Capital,” International Studies Quarterly 33 (12 1989), pp. 475–99CrossRefGoogle Scholar.

27. The point is not that portfolio diversification is the same as asset mobility but, rather, that the policy implications are parallel. A more sophisticated but somewhat more controversial version of this argument might focus on multinational corporations as combinations of intangible assets within a vertically integrated firm; the relevant literature is surveyed by Perry, Martin in “Vertical Integration: Determinants and Effects,” in Schmalensee, R. and Willig, R. D., eds., Handbook of Industrial Organization, vol. 1 (Amsterdam: North-Holland, 1989), pp. 183–255Google Scholar. Inasmuch as such assets can more easily be moved within multinational corporations, this does in fact make the assets of these corporations more geographically mobile than those of other firms in similar industries. See, for example, Shapiro, Daniel M., “Entry, Exit, and the Theory of the Multinational Corporation,” in Kindleberger, Charles P. and Audretsch, David B., eds., The Multinational Corporation in the 1980s (Cambridge, Mass.: MIT Press, 1983), pp. 103–22Google Scholar.

28. For an application of similar ideas to the cases of U.S. and French trade policies in the 1920s and the 1970s, see Milner, Resisting Protectionism.

29. It is worth emphasizing again that these conclusions abstract from many specifics that may indeed override them. For example, in the early 1980s, financial asset-holders in many Latin American countries benefited strongly from capital mobility. In the context of political instability and strong and unsustainable currency appreciations, they were able to get their money out of Latin America and to overseas bank accounts. On the process, see Lessard, Donald and Williamson, John, eds., Capital Flight and Third World Debt (Washington, D.C.: Institute for International Economics, 1987)Google Scholar. Clearly, other characteristics of these political economies outweighed the tendencies discussed here.

30. For a more detailed argument to this effect, see Frieden, Jeffry A., “Third World Indebted Industrialization: State Capitalism and International Finance in Mexico, Brazil, Algeria, and South Korea,” International Organuation 35 (Summer 1981), pp. 407–31CrossRefGoogle Scholar. The degree to which workers and others benefited from the capital inflow would depend, in this framework, on how specific their assets were.

31. For an elaboration of this argument, see Frieden, , Banking on the World, especially pp. 196–246Google Scholar.

32. Much of this discussion abstracts to an extent from the effects of specific policy episodes, such as those involving the United States in the 1980s. I return to this problem in the following section of the article. My discussion here also does not take into account such significant national variations as different rates of productivity growth on the part of domestically based firms.

33. This must be qualified on the basis of the institutional and industrial structure of the various sectors. For example, in cases in which the domestic financial services industry or subsections of it are local cartels, financial integration may serve to undermine the cartel. Such nuances are of course important, but so broad a sweep as in this article cannot do them justice.

34. See Dollar, David and Frieden, Jeffry, “The Political Economy of Financial Deregulation in the United States and Japan,” in Luciani, Giacomo, ed., Structural Change in the American Financial System (Rome: Fondazione Olivetti, 1990), pp. 72–102Google Scholar. Again, this generalization ignores specific national policy episodes, such as that involving American capital imports in the 1980s. In my own defense, however, I can note that those involved in political debates over the regulation of international financial flows to and from the United States do appear to have longer-term considerations in mind.

35. For details on the 1983 IMF quota increase debate, see Frieden, , Banking on the World, pp. 179–90Google Scholar.

36. Again, as mentioned above, this should be qualified with careful attention to national institutional differences. In such countries as Spain and Italy, the national banking system tended to function as a protected cartel, so that the removal of capital controls and financial regulations may have harmed segments of the financial community. The issue is not clear-cut; banks might support the removal of capital controls but oppose the entry of foreign banks, and the stronger local banks might welcome deregulation if this would allow them to begin building relations with banks abroad. This is, of course, a topic on which further research must be done.

37. See Cohen, Benjamin J., “European Financial Integration and National Banking Interests,” in Padoan, Pier Carlo and Guerrieri, Paolo, eds., The Political Economy of European Integration (London: Harvester Wheatsheaf, 1989), pp. 145–70Google Scholar. For an interesting perspective on the implications of financial deregulation, see the following works of Grilli, Vittorio: “Financial Markets and 1992,” Brookings Papers on Economic Activity, no. 2, 1989, pp. 301–24CrossRefGoogle Scholar; and “Europe 1992: Issues and Prospects for the Financial Markets,” Economic Policy 9 (10 1989), pp. 388–421Google Scholar. Regarding the important issue of the U.S. response to European and Japanese policies, see Bayard, Thomas and Elliot, Kimberly Ann, “Reciprocity in Financial Services: The Schumer Amendment and the Second Banking Directive,” mimeograph, 1990Google Scholar.

38. Two excellent studies are Pauly's, Louis W.Opening Financial Markets: Banking Politics on the Pacific Rim (Ithaca, N.Y.: Cornell University Press, 1988)Google Scholar and Rosenbluth's, Frances McCallFinancial Politics in Contemporary Japan (Ithaca, N.Y.: Cornell University Press, 1989)Google Scholar. In Japan, as in some European nations, members of the banking community were reluctant to see international competition threaten their domestic cartel, but the rapid globalization of financial markets appears to have led them to regard deregulation as the better of two evils. For a more detailed elaboration of this argument, see Dollar and Frieden, “The Political Economy of Financial Deregulation in the United States and Japan.” For an argument that is complementary in many ways to the one presented here, see Goodman, John and Pauly, Louis, “The New Politics of International Capital Mobility,” mimeograph, Harvard University Business School and University of Toronto, 1990Google Scholar.

39. There are a number of ways of thinking about this. In one, the result obtains because difficulty of exit from a sector constitutes a barrier to entry to it: the knowledge that investment in the sector contains an important irreversible component will reduce the likelihood of new investors entering in response to relative price changes that may not be permanent. In this sense, barriers to exit are barriers to entry; since entry barriers increase the effectiveness of sector-specific policies in aiding existing agents in the sector, they increase the returns to political lobbying.

40. Possibilities such as these tend to imply imperfect competition—increasing returns and learning-by-doing—in the financial sector, which is almost certainly the case. For a representative theoretical approach along these lines, see Williamson, Stephen D., “Increasing Returns to Scale in Financial Intermediation and the Non-Neutrality of Government Policy,” Review of Economic Studies 53 (10 1986), pp. 863–75CrossRefGoogle Scholar.

41. This is just a restatement of the general notion that the capital markets and political lobbying are in some sense substitutes (albeit imperfect ones). This idea sounds absurd to most political scientists, but perform the following thought experiment: if import-competing automobile manufacturers could sell all of their equipment to the Japanese at a price that would allow them to make a market profit, their incentive to engage in costly and time-consuming lobbying for protection would be much lower. Or, alternatively, if autoworkers could in some way sell their skills and their seniority to Japanese autoworkers for an amount equal to what they might have hoped to earn with these skills and seniority, their incentive to lobby would be lower. The fact that markets for these assets are incomplete or nonexistent simply serves to point out that the politicization of the issue is expected. While there are not markets for these assets, there are good markets for other assets—and we expect owners of such assets to be less politically active.

42. Some complications may result from this melding of the Mundell-Fleming and specific-factors models. The Mundell-Fleming model generally assumes some unutilized resources and some wage stickiness, while the specific-factors model does not. The contradiction may be relevant for the analysis of effects on national welfare, but it does not appear to matter much for the shortand medium-term distributional effects, which are the focus here. For a discussion, see Corden, , Inflation, Exchange Rates, and the World Economy, pp. 22–34Google Scholar.

43. There are exceptions: producers of tradable goods in which competition is not primarily on price (and is instead, for example, on quality) will be less sensitive to exchange rate movements.

44. Inasmuch as a devaluation changes the price of tradable goods relative to that of nontradable goods, it affects producers in the nontradables sector. However, such price volatility affects all national nontradables producers more or less equally and is therefore far less significant to them than it is to tradables producers, who see their output change in price relative to that of their competitors.

45. For those unfamiliar with the approach, the real exchange rate can be expressed as the relationship between the price of nontradable goods and that of tradable goods. By assumption, the price of tradables is set on world markets and cannot be changed (in foreign currency terms) by national policy. In other words, the foreign currency price of tradables is an anchor around which domestic prices move. Depreciation makes tradables relatively more expensive in domestic currency terms, while nontradables become relatively cheaper. Appreciation has the opposite effects. In the real world, these effects can be offset, for example by characteristics of product markets, but there is little doubt that the general pattern holds. When the dollar was strong, the dollar prices of television sets and clothing were low, while the price of housing soared. As the dollar fell, the dollar price of hard goods rose, while the price of housing stagnated or declined. Despite some controversy about the approach, it is close enough to consensual to warrant its use.

One important consideration to keep in mind is the extent to which the relative price effect (say of an appreciation on raising demand for nontradable goods) may be counteracted by the macroeconomic effect (say of reduced aggregate demand more generally); this is, so to speak, the contest between the income and substitution effects or between expenditure reduction and expenditure switching. For a useful survey and application to the LDCs, see Edwards, Sebastian, Real Exchange Rates, Devaluation and Adjustment (Cambridge, Mass.: MIT Press, 1989)Google Scholar. For more technical essays, see Bilson, John and Marston, Richard, eds., Exchange Rate Theory and Practice (Chicago: University of Chicago Press, 1984)CrossRefGoogle Scholar. Another point to keep in mind is that the nontradable goods and services sector includes those who operate behind prohibitive barriers to trade (especially quotas).

46. Of course, from the standpoint of an overseas investor, the desire for a strong home currency to allow greater purchases of overseas assets is balanced by the desire to maximize home currency earnings from these assets, which demands a weak home currency. The best possible scenario, as usual, is to buy cheap and sell dear—that is, to buy foreign currency when the home currency is strong and sell it when the home currency is weak. There are a number of defensible theoretical reasons why international investors might favor strong home currencies; it is probably enough to note here that empirically they tend to do so. On the relationship between foreign direct investment and the exchange rate, see Kohlhagen, Steven W., “Exchange Rate Changes, Profitability, and Direct Foreign Investment,” Southern Economic Journal 44 (07 1977), pp. 43–52CrossRefGoogle Scholar.

47. Practically the only systematic empirical study on these issues in recent years is Destler, I. M. and Henning's, C. RandallDollar Politics: Exchange Rate Policymaking in the United States (Washington, D.C.: Institute for International Economics, 1989)Google Scholar, which appears to bear out some of these observations. The issue is somewhat clouded by the difficulty, which Destler and Henning recognize, of separating debates over the level of the exchange rate from debates over its volatility; in the early 1980s in the United States, the former tended to dominate the latter. The authors note that international financial institutions benefit from exchange market volatility, which can make their trading desks extremely profitable. However, they should—and many do—weigh this benefit against the cost of international business foregone because of uncertainty about currency values. At least some portion of the international business of American money-center banks is due to the widespread belief in the reliability of the dollar and the American macroeconomic environment more generally.

48. The literature on the EMS is now enormous, and almost all of it is purely economic in content. For an excellent survey along these lines, see Giavazzi, Francesco and Giovannini, Alberto, Limiting Exchange Rate Flexibility: The European Monetary System (Cambridge, Mass.: MIT Press, 1989)Google Scholar. For a good study that discusses many of the domestic and international political aspects of the EMS, see Ludlow, Peter, The Making of the European Monetary System (London: Butterworth, 1982)Google Scholar; unfortunately, events have moved far beyond what Ludlow described in 1982.

49. I avoid three issues that are more closely associated with a single currency per se: the potential welfare costs of reduced seignorage opportunities, the welfare gains associated with reduced transactions costs, and the potentially differential impact of these reduced transactions costs on various economic agents. I focus entirely on the more immediate issue of the differential effects of fixed but adjustable exchange rates within the EMS. For a discussion of some of these other issues, see Eichengreen, Barry, “One Money for Europe?” Economic Policy 5 (04 1990), pp. 118–87Google Scholar.

50. See Warburg, S. G. Securities, Into the ERM: The Outlook for the UK Economy and Equity Market, London, 08 1990Google Scholar. A summary table is on p. 31, but more useful sectoral summaries are on pp. 32–52. The projections are complicated a bit (for our purposes) by the study's conflation of greater exchange rate stability with a firmer pound sterling, both of which it expects to ensue but which may operate in slightly different directions distributionally, as I discuss below. The study also notes that while 45 percent of profits from firms in the Financial Times stock exchange index are from overseas activities (exports and profits of foreign affiliates), only 13 percent come from the EC and 17 percent from North America. This may help explain some of the British reluctance to tie sterling to the ERM, especially at a time when the European currencies were appreciating strongly against the dollar.

51. The twelve corporate members are Barclays, British Aerospace, British American Tobacco, British Petroleum, Citibank, Ernst and Young, Goldman Sachs, Imperial Chemical Industries, Midland Montagu, Salomon International, Shearson Brothers, and S. G. Warburg. The Association of Corporate Treasurers is also a member.

52. For an evaluation of many of these developments, see Frankel, Jeffrey, “The Making of Exchange Rate Policy in the 1980s,” mimeograph, University of California at Berkeley, 1990CrossRefGoogle Scholar. Again, the political economy component of Frankel's discussion focuses, as did most of the debates, on the level of the exchange rate rather than on its volatility.

53. In Dollar Politics, pp. 17–80, Destler and Henning provide an excellent interpretive survey of the course of dollar politics and policies over the 1980s.

54. For descriptions of the interplay of the various interest groups, see Destler and Henning, Dollar Politics; Frankel, “The Making of Exchange Rate Policy in the 1980s”; and Henning, C. Randall, “International Monetary Policymaking Within the Countries of the Group of Five,” mimeograph, 1990Google Scholar.

55. One influential and controversial proposal was offered by Williamson, John and Miller, Marcus in Targets and Indicators: A Blueprint for the International Coordination of Economic Policy (Washington, D.C.: Institute for International Economics, 1987)Google Scholar.

56. For some representative surveys of this rapidly growing literature, see Feldstein, Martin, ed., International Policy Coordination (Chicago: University of Chicago Press, 1988)Google Scholar; and Frankel, Jeffrey, Obstacles to International Macroeconomic Policy Coordination, Princeton Studies in International Finance no. 64 (Princeton, N.J.: Department of Economics, International Finance Section, 1988)CrossRefGoogle Scholar.

57. For a demonstration of this point, see Frankel, Jeffrey and Rockett, Katharine, “International Macroeconomic Policy Coordination When Policy-Makers Do Not Agree on the True Model,” American Economic Review 78 (06 1988), pp. 318–40Google Scholar. The argument is controversial; among other things, it assumes that policymakers try to maximize national welfare, ignores the potential costs of not cooperating (or not appearing to cooperate), and makes it difficult to explain circumstances in which coordination has apparently been achieved.

58. See, for example, Giovannini, Alberto, “National Tax Systems Versus the European Capital Market,” Economic Policy 9 (10 1989), pp. 346–86Google Scholar.