Convertibility, currency controls and the cost of capital in Western Europe, 1950-1999

For most of the post-war period, Europe s capital markets remained largely closed to international capital flows. Thispaper explores the costs of this policy. Using an event-study methodology, I examine the extent to which restrictions ofcurrent and capital account convertibility affected stock returns. The delayed introduction of full currency convertibilityincreased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapseof the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mountingevidence suggesting that capital account liberalization facilitates growth.