Convertibility, Currency Controls and the Cost of Capital in Western Europe, 1950-1999

For most of the postwar period, Europe’s capital markets remained largely closed to international capital flows. This paper explores the costs of this policy. Using the familiar event-study methodology, we examine the extent to which restrictions of current and capital account convertibility affected stock returns. We find that the delayed introduction of full currency convertibility increased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapse of the Bretton Woods System had considerable negative effects. These findings demonstrate that the introduction of capital controls can impose significant costs. JEL classification: G15, G18, F21, F36, N24, N74