Interaatianal Capital Mobility and Exchange Rate Valatility

Three post-1980 developments have instilled in many observers a feeling that all is not quite right with the world financial system: the international debt problem of many developing countries, the large U.S. current account deficit and the corresponding cumulation of foreign indebtedness, and the heightened volatility of exchange rates and other asset prices in world financial markets. To what extent are the large swings in prices and quantities on international financial markets attributable to a higher degree of international capital mobility in the 1980s? This paper examines, first, various ways of quantifying the degree of international capital mobility, and, second, implications of high capital mobility for the possibility that exchange rates are "excessively volatile."