The Center and the Periphery: The Globalization of Financial Turmoil

This research project creates a new database of international capital flows from the early 19th century, when London became the financial capital of the world, until 1931, when international capital markets collapsed.

A majority of empirical studies on the characteristics and effects of international capital flows examine the experience of the last 30 years simply because of data availability. While this data enables researchers to untangle the cross-country differences in international capital flows and the links to country fundamentals, they cannot help examine the effects of infrequent shocks in international capital markets. For example, since 1970 all the financial crises and the capital flow reversals they triggered started in countries in the periphery. In contrast, the ongoing global financial crisis started in the financial center, similarly to the crises in 1825, 1873, and 1931. Comparing the current crisis to those of earlier periods will provide answers regarding the mechanisms of contagion when the financial center is the epicenter and help assess the future scope of the current crisis. This database on capital flows that spans two centuries greatly assists in this endeavor.