inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

macroprudential regulation versus mopping up after the crash this paper compares ex ante policy measures such as macroprudential restrictions on leverage and ex post policy interventions such as bailouts to respond to systemic risk i e to the danger that an economy may experience nancial feedback loops in which falling asset prices declining net worth and tightening nancial constraints reinforce each other ex post policy measures are better targeted since they are taken only once a crisis has materialized but they aggravate the over investment problem ex ante and introduce a time consistency problem ex ante policy measures are more blunt but they can both mitigate the pecuniary externalities that arise during crises and resolve the time consistency problem in ex post policies we nd that except in limit cases it is optimal to respond to systemic risk by using a mix of both ex ante measures and ex post interventions and characterize the optimal policy mix furthermore limiting bailouts to the revenue accumulated in a bailout fund reduces welfare

international economic structures government interests and international coordination of macroeconomic adjustment policies analysts have commonly argued that there has been a decline in international coordination of the kinds of policies that governments can use to manage the international payments imbalances that emerge when different governments pursue different macroeconomic policies the decline typically has been attributed to a posited decline in american hegemony in contrast this article argues that international coordination of macroeconomic adjustment policies trade and capital controls exchange rate policies balance of payments financing and monetary and fiscal policies was at least as extensive for much of the 1980s as it had been in the 1960s there was however a shift away from coordination of balance of payments financing and other policies that have limited direct consequences for domestic economic and political conditions and a concurrent shift toward coordination of monetary and fiscal policies that are critically important for domestic politics and economics this change is best explained as a consequence of changes in the structure of the international economy most important international capital market integration encouraged governments to coordinate monetary and fiscal policies because balance of payments financing and exchange rate coordination alone are insufficient to manage the enormous payments imbalances that emerge when capital is able to flow internationally in search of higher interest rates and appreciating currencies

business segmentation and location revisited innovation and the terra incognita of large firms hayter r patchell j and rees k 1999 business segmentation and location revisited innovation and the terra incognita of large firms reg studies 33 425 442 this paper revisits ideas about the relationships between business segmentation and location by articulating the characteristics and roles of large firms lfs the well known dual model of business segmentation with its emphasis on the polar cases of small firms and giant multinationals portrays a static exploitative picture of these relationships and does not relate well to the complexity of industrial organization or the size distribution of firms explicit recognition of lfs however draws attention to the processes generating segmentation and to the permeability of segment boundaries in which bargaining and learning are interdependent relationships a triad model of business segmentation based on porter s ideas of competitive strategy is outlined which reveals the vital role of lfs as innovators the model is illustrated heuristical

rollover risk as market discipline a two sided inefficiency abstract why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises this paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk however if assets are correlated a two sided inefficiency arises good aggregate states have intermediaries taking excessive risks while bad aggregate states suffer from costly fire sales the driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline in equilibrium financial intermediaries inefficiently amplify both positive and negative aggregate shocks

from cash in the market pricing to financial fragility we review some recent research that explores the relationship between asset price volatility and financial fragility when markets and contracts are incomplete jel e5 g2

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

the subcontracting behavior of single vs multiplant enterprises in us manufacturing implications for economic development abstract in this paper we explore the factors shaping the production subcontracting make buy decisions of managers in the plants of both small and large firms in 21 industries that constitute the us metalworking and machinery manufacturing sector descriptive and multivariate statistical analyses of original survey data collected in 1986 1987 lead us to infer that a regional economic development strategy that promotes those manufacturing firms with a single relatively large plant making a diverse range of products and having close ties to customers but limited internal machining capacity has the greatest potential for generating local backward linkages in this respect we find empirical if nuanced support for certain normative aspects of the industrial district or networking approach to economic development policy

precautionary reserves and the interbank market large excess reserve balances are held by banks in the u s despite the ability of large banks to closely target end of day balances close to zero we show that the friction faced by small banks to participate in the fed funds market leads to all banks holding precautionary reserves the precautionary motive for reserves can explain that small banks hold relatively large amounts of excess reserves overnight while at the same time lending large amounts to large banks small banks are large net lenders despite their reluctance to lend as large of a percentage of available balances during the day as large banks we also explain an increase in the volatility of the fed funds rate late in the day

inefficient investment waves we show that firms individually optimal liquidity management results in socially inefficient boom and bust patterns financially constrained firms decide on the level of their liquid resources facing cash flow shocks and time varying investment opportunities firms liquidity management decisions generate simultaneous waves in aggregate cash holdings and investment even if technology remains constant these investment waves are not constrained efficient in general because the social and private value of liquidity differs the resulting pecuniary externality affects incentives differentially depending on the state of the economy and often overinvestment occurs during booms and underinvestment occurs during recessions in general policies intended to mitigate underinvestment raise prices during recessions making overinvestment during booms worse however a well designed price support policy will increase welfare in both booms and recessions

the corporation competition and the invisible hand few would disagree that adam smith s invisible hand theorem is the heart of the economist s weltanschauung ask whether trade barriers should be lowered the spread of multinational corporations restrained oil prices deregulated cartels dissolved or more fundamentally whether a market based capitalist system is economically superior to a state run socialist system and economists almost certainly will begin to answer the question by trying to apply the theorem every student knows that the theorem depends on the assumption of atomistic competition which in turn assumes that the system is decentralized and that no competitor is large relatively to others there is another crucial assumption however that is often ignored and usually underemphasized namely that all competition is price competition in reality one of the most distinctive features of capitalism one that is most often raised in lay discussions of its merits and demerits is the prevalence of other forms of competition such as competition in research development and advertising competition to obtain and hold monopoly and competition for corporate growth these various forms of non price competition we shall aim to show are not clearly analogous with the theory of price competition more non price competition rather than less is not necessarily pareto optimal self evidently the production side of a market economy is decentralized only to a limited degree i e to the level of a decision making unit composed of more than one human such a unit playing neuron to the invisible hand is typically called a firm it is in fact a team rather than remaining small firms are in practice composed of any number of individuals from a handful on to half a million some

there are two sides to every story innovation and collaboration within networks of large and small firms abstract inter firm collaboration for innovation increasingly appears as a industrial response to changing economic and technological conditions both in the uk and internationally this paper examines such responses particularly at an informal level between small and large firms in the light of recent arguments about economic and technological imperatives disorganised capitalism control versus cooperation and the growing debate over the significance of networks using a case study approach the motives and problems of firms in such relationships are explored with special reference to the uk context

optimal bank regulation and fiscal capacity financial regulation is synchronized across countries despite the fact that countries vary widely in their ability to bail out their banking sector in the event of a nancial crisis this paper addresses the question of whether countries with dierent scal capacity should optimally have dierent ex ante minimum bank capital requirements in an environment with endogenously in complete markets and overinvestment because of moral hazard and pecuniary externalities i show that countries with larger scal capacity should have lower ex ante minimum bank capital require ments this result is the opposite of what one may expect given that countries with larger scal capacity often have stronger moral hazard i also show that in addition to a minimum bank capital requirement regulators in countries with strong moral hazard which are countries with a concen trated nancial sector and large scal capacity should impose a limit on the amount of liquidity pledged by nancial institutions in a crisis state this would entail restricting the amount of put options cds contracts sold by nancial institutions among other measures

international capital mobility amongst the major industrialised countries too little or too much this paper examines capital flows among the major industrialized countries with a view to assessing m feldstein and c horioka s 1980 claim that international capital mobility is limited it argues that saving investment correlation tests are inherently flawed and proposes an alternative methodology for testing the degree of international capital mobility it finds that capital flows have been excessive in the sense that they are driven by speculative forces rather than by economic fundamentals copyright 1995 by royal economic society

architecture of equity markets the abidjan regional bourse literature on financial market liberalization focuses heavily on state activity in allocating preferential credit i consider state activity in promoting nascent equity markets by asking why a state would create and promote a market in which the transaction costs are high the potential rate of return is low and firms are reluctant to list shares i examine the case of the west african regional stock exchange and propose that the central bank for the west african monetary union created it to mediate the relationship between this region and the world economy i propose that states and domestic markets act as complements rather than as rivals in some instances of bourse creation moreover bourses in developing economies present a different set of relationships among states public and private lending authorities and market participants than their counterparts in more developed financial environments this illuminates a need for further research in this area

economic segmentation worker power and income inequality how economic segmentation generates income inequality constitutes a central question for theories of economic and social organization and of socioeconomic achievement previous research emphasizes two sources of the structural variation in income 1 employers with large amounts of resources for a variety of reasons may find it in their interests to pay workers higher wages and 2 some workers are able to acquire power against their employers as well as against other workers and can therefore extract higher earnings in this paper we investigate several issues involved in the links among economic segmentation worker power and income inequality we argue that the structure of economic segmentation is multidimensional and reflects such distinct concepts as concentration economic scale state intervention in the market capital intensity and organization size worker power also is derived from diverse sources such as union membership occupational skill and licensing class position and tenure wi

economic crisis and policy choice the politics of adjustment in the third world the acute economic pressures of the 1980s have forced virtually all of latin america and africa and some countries in asia into painful austerity programs and difficult economic reforms scholars have intensively analyzed the economics of this situation but they have given much less attention to the political forces involved in this volume a number of eminent contributors analyze the politics of adjustment in thirteen countries and nineteen governments drawing comparisons not only across the full set of cases but also within clusters selected to clarify specific issues why do some governments respond promptly to signs of economic trouble while others muddle indecisively for years why do some confine their response to temporary macroeconomic measures while others adopt broader even sweeping programs of reform what leads some countries to experiment with heterodox approaches while most however reluctantly pursue orthodox courses why confronted with intense political protest have some governments persisted while others have altered or abandoned course the answers to these questions are political not economic and they are examined here by thomas m callaghy stephan haggard miles kahler robert r kauman joan m nelson and barbara stallings

an experiment on the efficiency of bilateral exchange under incomplete markets abstract we test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market in this model traders choose asset holdings constrained by a technology frontier next each trader experiences a random shock which makes only one type of asset profitable in a general equilibrium environment with incomplete markets this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal this behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices we find that when markets are incomplete a bilateral exchange can slightly mitigate the extent of pecuniary externalities and weakly increase welfare

the law of one price an examination of price integration between europe and regional markets in africa this study examines the degree of price integration of equity index assets between the major markets of africa namely morocco tunisia egypt kenya nigeria namibia and south africa with the prominent european markets of london and paris the application of vector autoregressive and autoregressive distributed lag methods reveals that african markets are largely price segmented the only markets that are price integrated have shared economic and financial institutions such as namibia and south africa and egypt tunisia and france the evidence suggests that development policy should be focussed on enhancing existing institutions rather than embarking prematurely on regional integration

phoenix risen the resurrection of global finance of all the many changes of the world economy since world war ii few have been nearly so dramatic as the resurrection of global finance a review of five recent books suggests considerable diversity of opinion concerning both the causes and the consequences of financial globalization leaving much room for further research competing historical interpretations stressing the contrasting roles of market forces and government policies need to be reexamined for dynamic linkages among the variables they identify likewise impacts on state policy at both the macro and micro levels should be explored more systematically to understand not just whether constraints may be imposed on governments but also how and under what conditions and what policymakers can do about them finally questions are also raised about implications for the underlying paradigm conventionally used for the study of international political economy and international relations more generally

the european monetary system list of figures list of tables preface 1 introduction niels thygesen part i the international environment 2 the european monetary system the dollar and the yen rudiger dornbusch discussion robert triffin discussion charles wyplosz part ii disinflation external adjustment and cooperation 3 monetary discipline and cooperation in the european monetary system a synthesis jacques melitz discussion jose vinals 4 the role of the exchange rate regime in a disinflation empirical evidence on the european monetary system francesco giavazzi and alberto giovannini discussion william branson 5 inflation and the european monetary system susan m collins discussion jean jacques rey 6 economic growth and exchange rates in the european monetary system their trade effects in a changing external environment stefano vona and lorenzo bini smaghi discussion david begg part iii exchange rates capital mobility and monetary coordination 7 exchange rates interest rates capital controls and the european monetary system assessing the track record michael j artis and mark p taylor discussion emil maria claassen and eric peree 8 the stability and sustainability of the european monetary system with perfect capital markets john driffill discussion daniel gros 9 competitiveness realignment and speculation the role of financial markets maurice obstfeld discussion marcus miller discussion herakles polemarchakis 10 interventions sterilisation and monetary policy in european monetary system countries 1979 87 cristina mastropasqua stefano micossi and roberto rinaldi discussion wolfgang rieke 11 monetary policy coordination within the european monetary system is there a rule massimo russo and giuseppe tullio discussion lucas papademos part iv the future of the european monetary system 12 the european monetary system a long term view tommaso padoa schioppa 13 a new phase in the european monetary system exchange rate constraint capital liberalisation and policy coordination a report of the conference panel discussion lamberto dini peter kenen rainer masera wolfgang rieke luigi spaventa and jacques waitzenegger index

pecuniary externalities in economies with financial frictions this article characterizes the efficiency properties of competitive economies with financial constraints in which phenomena such as fire sales and financial amplification may arise we show that financial constraints lead to two distinct types of pecuniary externalities distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price dependent financial constraints for both types of externalities we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations we also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities we demonstrate how to employ our framework in a number of applications whereas collateral externalities generally lead to over borrowing the distortions from distributive externalities may easily flip sign leading to either under or over borrowing both types of externalities may lead to under or over investment

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

understanding the competitive process a guide to effective intervention in the small firms sector abstract the paper describes a project undertaken within the economic and social research council s competitiveness of british industry research programme the aim of the project was to assist agencies who intervene in a local economy to try to help individual small firms guidance currently available to such agencies was considered to lack an adequate theoretical basis in relation to either the choice of firms who should be granted assistance or the form of assistance which might be given in particular there is a lack of recognition that there is scope for management strategy among smaller firms affecting the way they compete in the market place and having a clear bearing on their revealed performance from a study of 100 small firms located in telford new town criteria were derived for classifying the competitive stance of small firms this was identified as the key to the potential performance of the small firm the extent to which it reveals a potential for future growth can determine whether a firm is or not a suitable candidate for assistance and the strengths and weakness in an individual firm s stance can determine the most suitable form of assistance to give the survey and analysis exercise leading to the identification of components of competitive stance are described and the classification of firms into a range of stance types then the usefulness of the competitive stance classification as a guide to selection of firms and choice of form of assistance is considered

volatility and growth credit constraints and the composition of investment abstract how does uncertainty and credit constraints affect the cyclical composition of investment and thereby volatility and growth this paper addresses this question within a model where firms engage in two types of investment a short term one and a long term one which contributes more to productivity growth because it takes longer to complete long term investment has a relatively less cyclical return but it also has a higher liquidity risk the first effect ensures that the share of long term investment to total investment is countercyclical when financial markets are perfect the second implies that this share may turn procyclical when firms face tight credit constraints a novel propagation mechanism thus emerges through its effect on the cyclical composition of investment tighter credit can lead to both higher volatility and lower mean growth evidence from a panel of countries provides support for the model s key predictions

intermediary asset pricing abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary intermediaries face an equity capital constraint risk premia r

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

labour market segmentation and workers careers the case of the italian knitwear industry this paper reports on empirical research into the labour market in the knitwear and ready to wear industry in the province of jvjodena emilia in particular it looks at the careers of three categories of workers homeworkers those employed on the production lines of larger firms and artisans 1 italy in common with many other industrialised capitalist countries has witnessed a growing decentralisation of production this tendency has been differently interpreted but a consensus is emerging that such developments are not evidence of economic backward ness 2 on the contrary an industrial structure consisting of firms of different size but with a large number of small and even microscopic enterprises is increasingly being recog nised as one possible avenue of economic development taking this for granted the aim of these notes is to investigate the structure of the labour market in a prosperous area typified by economic growth which has the small firm as its base element

business organization segmentation and location taylor m and thrift n 1983 business organization segmentation and location reg studies 17 445 465 this paper is intended to provide a coherent theoretical framework for industrial geography industrial economics and organization theory based on the notion of the segmentation of business organizations the literature on dualism and segmentation of business organizations is reviewed and found wanting an alternative process oriented account of segmentation of the business organization is presented which can account for the structural variations in present day developed economies the geographical implications of the framework are brought out

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

credit externalities macroeconomic effects and policy implications financial crises are often preceded by peri ods of credit expansion during which firms and households become increasingly vulnerable to a reversal in economic conditions when eco nomic conditions actually worsen financing constraints become tighter causing a deeper contraction of economic activity these events have led to policy proposals for preventing excessive borrowing during normal times if rational agents evaluate financing decisions from a privately optimal standpoint why would the debt level not be socially efficient the theoretical literature has offered an answer to this question based on a pecuniary externality that arises due to the presence of financial frictions private agents tend to under value net worth during a period of financial distress because they fail to internalize the fact that additional net worth would have positive spillovers on other agents balance sheets 1 as a result private agents borrow excessively the quantitative implications of these credit exter nalities however remain largely unknown in particular these key questions have not been addressed

collateral constraints and the amplification mechanism abstract kiyotaki and moore j polit economy 105 1997 211 have offered a theory for how common shocks to credit constrained firms are amplified through changes in collateral values and transmitted as fluctuations in output i clarify and extend their model by showing that their collateral amplification mechanism is not robust to the introduction of markets that allow these firms to hedge against common shocks a theory of incomplete hedging is proposed in which the supply of hedging available in the economy is constrained by the aggregate value of collateral i illustrate how the constraint reinstates amplification effects and discuss empirical implications of this new mechanism

political responses to interdependence what s left for the left heightened economic interdependence in recent years is commonly argued to have generated great pressures for convergence in economic policies across the advanced industrial democracies interdependence has clearly had a great impact on the types of economic policies that governments can pursue they have been unable to pursue independent fiscal and monetary policies since the mid 1970s furthermore all governments have been forced to attempt to promote the competitiveness of national goods and services in world markets and to increase the speed and efficiency with which national producers adjust to changes in global markets there are however different policies consistent with these goals statistical analyses of economic policies since the mid 1970s show that governments of the left and the right continue to be able to enact distinctive supply side policies that promote competitiveness and flexible adjustment and simultaneously further their partisan objectives

excessive dollar debt financial development and underinsurance we propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar denominated external debt present in these markets we show that when financial constraints affect borrowing and lending between domestic agents agents undervalue insuring against an exchange rate depreciation since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars this result implies that domestic agents choose excessive dollar debt we also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets the retarded entry reinforces the underinsurance problem

different trajectories in the social divisions of labour the cutlery industry in sheffield england and tsubame japan to contribute to the growing debate on the social division of labour and its implications for local development this paper comparatively analyses recent trends in the industrial organisation of the cutlery industry in sheffield and tsubame both industries evolved as flexibly specialised export oriented production systems based on a highly interdependent network of small firms in the past 20 years however the social division of labour underlying sheffield s cutlery industry has been much reduced in size and complexity while tsubame has retained and used its social division of labour to adjust towards more value added production the different trajectories of the two systems reflect different approaches to competitiveness in tsubame the emphasis is on innovation while in sheffield the industry has been extremely conservative placing emphasis on minimising costs

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