Capital Mobility Analysis

Capital mobility analysis studies how the international mobility of capital constrains — or fails to constrain — national economic policy. Robert Mundell's 1963 work established the open-economy trilemma: a country cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy, and must give up one. The political economy literature, exemplified by Geoffrey Garrett's 1998 Partisan Politics in the Global Economy and Dennis Quinn's 1997 measurement of financial liberalization, asks whether rising capital mobility forces a 'race to the bottom' in taxes and welfare or instead leaves room for partisan and compensatory policy. The empirical method regresses policy or taxation outcomes on measures of capital-account openness — the Quinn index, the Chinn-Ito index — with partisan interactions.