• Matthew Smylie

International capital mobility and state choice over policy

In a world of unrestrained international capital mobility, states have been viewed as increasingly obsolete, forced to enact policies which appease the owners of capital. This post investigates the ways and the degree to which international capital mobility constrains the policy choice of states.

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It is a commonly held argument that in a globalised world, in which capital can move freely across borders, nation states find themselves in a straightjacket and are no longer able to pursue their preferred policies (Frieden, 1991: 427). This paper investigates the effect that footloose capital has on states, focusing on both the ways and the degree to which international capital mobility (ICM) constrains the policy choices of OECD states.

This post argues against the proponents of the Capital Mobility Hypothesis who suggest that footloose capital, through its mere capacity to exit, imposes a strong structural constraint on the policy choices of developed states. Firstly, when investors judge developed states, they focus their attention on information that highlights the rate of return, disregarding indicators related to default risk. Resultantly, the developed nations of the OECD face a strong constraint in terms of macro-policy but maintain considerable autonomy in terms of micro-policy. Secondly, ICM has been overstated and the preferences of capital have been generalised. In terms of preferences, different forms of capital prefer different policies meaning that we cannot highlight a single policy set which states must enact to attract capital. Similarly, capital mobility remains imperfect due to technical barriers, institutional diversity and the behaviour of investors, thus suggesting that states face very little constraint in terms of policy choice.

Instead, the post argues that ICM can impose a strong constraint on developed states by operating as a ‘social fact’. If states share the belief that capital can move freely between nations, they find themselves forced to enact certain policies which enhance their credibility in the eyes of world markets. Here, international organisations and credit rating agencies play a key role in spreading ‘policy norms’ which states must adopt in order to maintain credibility. Yet, much depends on how states interpret the constraints that they face. Indeed, states can play an active role in setting the standards by which they are judged. Similarly, states maintain agential space in that they can deviate from policy norms without facing punishment in the form of capital outflows. The spectre of ICM may even act as an enabling force in which states strategically adopt the conventional wisdom in order to push through unpopular policy reforms.

International Capital Mobility and the Capital Mobility Hypothesis

The degree of ICM, that is, the ease of physical and financial assets to move across national borders, has changed throughout history. Prior to World War One, the international monetary system was dominated by the Gold Standard; a system which fixed domestic currencies to the price of gold and facilitated ‘unfettered capital mobility’ (Obstfeld et al, 2005: 424) at the expense of monetary independence. However, the prominence of high ICM ended in the late 1940s with the creation of the Bretton Woods system. Following the instability of the interwar years, critics such as Keynes had argued that exchange rate flexibility and the scope for hot money flows had been key in the drying up of world trade, employment and output (Obstfeld, 2002). The Bretton Woods system set out a new world order with pegged exchange rates, the creation of the IMF and a series of controls that would heavily restrict international capital flows (Eichengreen, 2008: 93).

However, following the demise of the Bretton Woods system in the early 1970s, international capital has once again become more mobile. The effectiveness of capital controls had been falling during the Bretton Woods era, with financiers finding more ways to avoid barriers and facilitate international capital flows (Eichengreen, 2008: 132). The ability of capital to transcend borders has been significantly enhanced by the development of money markets and technological innovations (Holloway, 1995: 133) which allow market participants to send large amounts of money around the world with the click of a button. As such, the contemporary setting is understood as one in which capital is unconstrained by distance and is able to move freely around the world. Indeed, the enhanced mobility of capital is evident in the fact that between 1990 and 2007, global cross-border capital inflows increased from around 1 trillion US dollars to 12.4 trillion US dollars, although capital flows have since been suppressed in the wake of the financial crisis (Donnan, 2017; Grenville, 2017). Thus, the history of ICM has, as Eichengreen (2008) argues, followed a U-shaped path of high mobility under the Gold Standard, restrained mobility under Bretton Woods, and a return to high mobility in recent history.

As a result of the increased spatial mobility of capital, many scholars have argued that ICM now acts as a structural constraint on the policies which states have to choose from (Andrews, 1994; Goodman & Pauly, 1993; Webb, 1991). Advocates of this ‘Capital Mobility Hypothesis’ argue that the mere ability of capital to exit national jurisdictions has fundamentally transformed the international economic structure, whereby states face ‘structural incentives…to pursue certain, amenable policy objectives’ (Sinclair, 2001: 99). This sits in contrast to agency-based accounts which focus on how capitalist agents use their voice to influence the direction of state policy (Gough, 2000: 77), as was the case in the UK when HSBC, one of the world’s largest financial services firms, threatened to leave over tax and regulatory considerations (Lambert, 2016). Rather, the Capital Mobility Hypothesis views ICM as an exogenous constraint whereby capital systematically rewards some actions whilst punishing others (Andrews, 1994: 197), and the capacity for capital to exit forces states towards a certain set of policies without any direct pressure from agents (Gough, 2000: 77).

If we adopt the view of the Capital Mobility Hypothesis, states face tight constraints on the policies which they can pursue. Indeed, capital is crucial to all states, providing jobs and fostering economic growth (Obstfeld, 1998: 10) whilst also allowing governments to finance public sector debt and current account deficits (Higgins & Klitgaard, 1998). Thus, states find themselves in competition for footloose capital and must ‘remove or alter institutions and practices objectionable to business and finance’ (Kurzer, 1993: 245) in order to attract capital to their country. The capacity to exit therefore forces states to pander to the interests of capital, abandoning those policies best suited to their domestic setting in favour of lower corporate tax rates, regulatory liberalisation, fiscal retrenchment and monetary stability in terms of inflation, currency exchange rates and interest rates. As such, the tight structural constraint imposed by ICM appears to have ‘undercut the policy capacity of the national state in all but a few areas’ (Cerny, 1995: 612), since any deviant policies will lead to substantial capital outflows.

Empirically, there are examples which appear to confirm the Capital Mobility Hypothesis for developed nations. Firstly, the OECD argues that ‘the growing integration of capital markets worldwide has significantly reduced governments’ ability to tax mobile capital’ (OECD, 1997: 10); an argument supported by the fact that the average OECD corporate tax rate fell by 7.5 percentage points between 2000 and 2016 (Houlder, 2017). Similarly, Gough (2000: 95) highlights the fact that the OECD nations have been directed towards deregulation of financial flows, relinquishing their control and strengthening the structural power of capital as a result. Further, there are examples of OECD nations being punished for deviant behaviour. This was the case in France when, in 1983, the new socialist government was forced to abandon its policy of unilateral expansion following a speculative attack on the franc (Cohen, 1996: 281). Thus, evidence from the OECD suggests that ICM does impose a strong structural constraint on states, significantly reducing policy choice.

Mosley's Insights

The Capital Mobility Hypothesis suggests that states face a strong structural constraint, forced to abandon a huge amount of their policy choice in order to attract and retain capital. However, an important insight is provided by Mosley (2000; 2003; 2005), who argues that the constraint faced by states is much narrower than that outlined in the previous section. Mosley suggests that the constraint imposed on states should be understood in terms of both scope and strength, where scope relates to the investment risk and quality of information facing financial markets, whilst strength reflects the state’s reliance on, and openness to, international capital flows (Mosley, 2003: 110). Here, the actions of investors are key, who must collect information and evaluate the investment risk associated with each borrower in order to decide where to direct their capital. Indeed, many types of risk are associated with investment decisions, including default risk, which indicates a borrower’s ability to repay, as well as inflation and exchange rate risk which influence the return on investments (Mosley, 2000: 112).

Using this framework, Mosley suggests that there will be a substantial difference between the policy constraints faced by developed and developing nations. When considering developing nations, investors will be concerned not only with the rate of return but also with default risk; they will employ a wide range of information in order to judge both a sovereign borrower’s willingness and ability to repay its loans (Mosley, 2000: 743). Such fears are well justified, with many examples of emerging nations failing to repay their loans, as was the case in 2001 when Argentina defaulted on its external debt (Beker, 2016: 31). Resultantly, developing nations face a ‘strong and broad’ (Mosley, 2003: 102) constraint in which financial markets influence not only macro-policy but also micro-policy (Mosley, 2005: 358). Thus, developing nations are likely to experience strong constraints in many policy areas, forced to adjust their approaches to social security, taxation and resource allocation in order to attract capital flows.

Yet, the constraint imposed by capital on developed nations is fundamentally different. The cost of collecting information is very high for investors and there is an incentive to take ‘information shortcuts’ (Mosley, 2000: 743). Thus, when investors consider developed nations they employ much less information, since the probability of a developed nation defaulting on its debt is judged to be non-existent (Mosley, 2000: 747). Therefore, in the case of developed nations with good credit risk, such as the members of the OECD, investors only pay attention to factors which affect the rate of return; namely budget deficits and inflation. As such, developed states face a ‘strong but narrow’ (Mosley, 2005: 358) constraint in which they must pursue low inflation and minimise budget deficits in order to demonstrate their credibility to financial markets. This means that developed states maintain autonomy in many policy areas such as the composition of government spending, taxation and supply-side policies, whilst also having the ability to choose how they achieve capital’s demands of low inflation and minimal budget deficits (Mosley, 2000: 766).

Taking examples from the real world, Mosley’s predictions for the constraints faced by developed countries appear to be confirmed. Whilst it was previously argued that nominal corporate tax rates have fallen as a result of the increased mobility of capital, Hobson (2003) shows that states have simultaneously broadened the base, meaning that the tax burden imposed on capital has in fact risen. Similarly, many studies show that the increase in ICM has not been accompanied by a shrinkage in the welfare state and government spending (Garrett, 1998; Swank, 2002; Bretschger & Hettich, 2002). Indeed, there continues to be a substantial difference between the institutions and policy choices of OECD states, as the coordinated market economies, including the Scandinavian states and Germany, continue to spend more on areas such as social protection, recreation and education than their liberal market economy counterparts (OECD, 2018a). Thus, OECD states maintain a large amount of choice and are able to pursue divergent policies despite rising ICM.

Further, evidence shows that OECD states have converged towards lower levels of inflation and budgetary deficits. Firstly, inflation rates have converged to lower levels in the OECD since the 1990s, mainly as a result of inflation-targeting by states (Hyvonen, 2004: 23), and now sit at a median of 2% (OECD, 2018b: 22). Further, budget deficits have converged towards lower levels (Martell, 2016: 174), although there have been numerous cases in which OECD states have built up considerable deficits, as was the case in the early 2000s when France and Germany exceeded the 3% ceiling outlined in the Stability and Growth Pact (Collignon, 2004: 15). These findings suggest that the Capital Mobility Hypothesis vastly overstates the constraint imposed by ICM on states. Rather, states are compelled to reduce budget deficits and pursue low levels of inflation to maintain credibility in the eyes of investors but maintain substantial choice in terms of micro-policy.

Reassessing Capital

The preceding sections have focused on how footloose capital impacts upon states, demonstrating that the mere ability of capital to exit a jurisdiction constrains states towards low inflation and low budget deficits. Yet, what has not been discussed is the assumption that capital is perfectly mobile and seeks the economy with the highest rate of return. Indeed, there is no single ‘capital’ and different forms of capital have different preferences regarding public policy and location. Similarly, there are very real restrictions on ICM and states are able to constrain capital flows if they so wish. This suggests that the constraint imposed upon states by ICM may be very weak since the majority of capital will not relocate even if their preferred policies are not enacted.

Firstly, capital does not exist simply as money or financial assets, but also as physical capital in the form of machinery and buildings (Holloway, 1995: 130), with large differences in their policy preferences and ability to relocate. A key point here is that in an economy such as Britain where financial capital remains distinct from manufacturing capital, there are likely to be different pressures exerted on interest rates (Gough, 2000: 88). In this case, financial capital will prefer a more contractionary monetary policy in the form of high interest rates in order to increase the return on investment, while the owners of physical capital prefer lower interest rates as it reduces the cost of borrowing. However, the conflict between these forms of capital will be reduced if ‘the organisation of finance and industry are intertwined, as in Germany’ (Ibid). Yet, cleavages also exist within these forms of capital, for example between the producers of non-tradable goods who typically prefer fiscal expansions and a strong domestic currency, and producers of tradable goods who tend to support monetary expansions and a weak domestic currency (Frieden, 1991). These different preferences show that there is no single set of ‘capital interests’ (Hardie, 2006: 75) which exert pressure on governments: investors and owners of capital are heterogeneous in their interests.

In terms of mobility, productive capital is far less mobile than financial capital (Perez, 2002: 72). Most evident is the fact that physical capital is tied to a specific country by the virtue that it is very hard to move installed equipment, whilst many firms are also tied closely into a network of customers and suppliers (Ibid). At the same time, national institutions play a key role in mediating the mobility of physical capital, with distinct varieties of capitalism drawing firms to particular jurisdictions (Mosley, 2005: 356). For example, in a coordinated market economy such as Germany, owners of physical capital benefit from an institutional structure which promotes high industry-specific skills, inter-company relations and industry level bargaining with trade unions (Hall & Soskice, 2001: 21-27). As such, firms find themselves tied to the institutions of a particular country, restricting their ability to relocate. What becomes clear from these observations is that the owners of physical capital cannot, or will not, simply relocate if the government does not enact their preferred policies; many factors tie them to a particular jurisdiction.

However, there are also clear barriers to mobility in terms of financial capital, notably in equity portfolios where investors continue to demonstrate a strong home bias. While the home bias has decreased since the 1990s, it still the case that investors concentrate on domestic equities, exemplified by the U.S. case where, in 2010, ‘U.S. investors held 78% of their equity portfolio in U.S. stock’ (Cooper et al, 2013: 296). In explaining this home bias, academics have looked at numerous factors which extend beyond the policy choices of states. One popular explanatory factor is transaction costs, in the form of fees, commission and information collection (Vo, 2008: 6), although such costs have decreased substantially with improvements in technology (Sinclair, 2001: 96). Further, information asymmetries are important, with investors preferring firms that have the same culture and language as themselves (Grinblatt & Keloharju, 2001: 1071).Similarly, Huberman (2001: 678) argues that the home bias can be explained from a behavioural aspect, whereby investors take comfort with the familiar and are fearful of foreign stocks purely because they are ‘alien’. Indeed, the complexity of the home bias puzzle suggests that there is no single causal factor, rather it is ‘a result of a mixture of rational and irrational behaviour of investors, and cross-country institutional differences’ (Sercu & Vanpee, 2007: 28). The home bias demonstrates that financial capital is imperfectly mobile, constrained by the behaviour of investors and country-specific institutions, suggesting that states can pursue deviant policies without facing the punishment of substantial capital outflows.

Whilst the evidence presented demonstrates that capital is far from mobile, it would be false to suggest that capital is completely immobile and does not impact upon states policy choice (Cohen, 1996: 289). Yet, it remains possible that states can curtail ICM in order to regain policy autonomy. International markets are not an exogenous force, with increased ICM coming as a result of the conscious decisions made by states (Laurence, 2001: 45). As such, states are able to reverse these decisions, enacting restrictions on capital mobility in order to reduce the effect that ICM has on restricting policy choice. Indeed, such policies have been suggested by OECD nations, with both Germany and France supporting a ‘broad financial transactions tax’ (Sandbu, 2011) which would raise revenues for governments whilst also reducing capital flows. However, the enforcement of capital controls is likely to be difficult, requiring states to persuade the general public, whilst also facing stiff opposition from businesses and finance (Helleiner, 1996). Indeed, the enforcement of policies such as a transactions tax would also incur both high administrative and economic costs in the absence of international cooperation (Cohen, 1996: 289-230). Thus, while it remains entirely possible for states to restrict capital flows in order to regain policy autonomy, the costs of such measures would be high (Goodman & Pauly, 1993: 81).

The evidence presented here does considerable damage to the idea that ICM imposes a strong structural constraint on states. It has been shown that ‘capital’ is not a single group which holds homogeneous preferences, but rather a diverse set of actors who pay attention to different indicators. Further, capital is far from perfectly mobile, both in terms of physical and financial capital, with investors tied to particular territories. At the same time, ICM is not an exogenous force and states are able to curtail the movement of capital if they are willing to bear the costs. These findings suggest that even in the realms of budget deficits and inflation, developed states can deviate and pursue expansionary policies without facing punishment from capital.

Social Facts and Perceptions of International Capital Mobility

Following the previous sections, it would appear that ICM imposes a relatively weak constraint on the policy choices of OECD states. Yet, the idea that ICM imposes a strong constraint on policy choice reappears if we approach the issue through a constructivist lens. From this perspective, the convergence that we observe in terms of lower budget deficits and low inflation in the OECD is not due to the structural power of footloose capital or the ability for capital to exit freely, but rather the shared perception amongst governments that capital will leave if certain policies are not enacted (Watson, 2001: 86-87). Resultantly, the constraints imposed by ICM have become a ‘social fact’ in which policymakers are under the illusion that only certain policies can be enacted and that divergent policies will be severely punished by large capital outflows (Chweiroth & Sinclair, 2013: 471). Thus, even in a world of relatively immobile capital, we will continue to observe convergence towards a certain policy set because of the shared beliefs that states hold regarding ICM.

Indeed, different actors contribute to shaping social facts, with international organisations and rating agencies playing an important role in the formation of collectively held beliefs and opinions (Chweiroth and Sinclair, 2013: 474). The OECD has played an important role in the movement towards capital liberalisation, defining the boundaries of legitimate policy action through its formal and informal rules (Abdelal, 2007: 37). As such, the OECD has been able to spread the norm of capital mobility not only to its existing members but also to those countries eager to join the organisation (Abdelal, 2007: 39). A similar dynamic is evident with the IMF which gathers information and publishes its ‘opinion of the economic policy rectitude of governments’ (Clift & Tomlinson, 2004: 519) thus influencing both states and market actors ideas of what constitutes a well-run economy. As such, developed states perceive the need to conform to these policy norms in order to maintain their credibility on the world stage.

In terms of credit rating agencies, bodies such as Moody’s have become highly influential, with their judgements held in high esteem by both governments and market actors (Sinclair, 2005: 2). These agencies are not objective; rather, they make judgements which ‘reflect particular ways of thinking and exclude other ways’ (Sinclair, 2005: 17). As such, these agencies produce norms of best practice in which governments are expected to ‘manage their affairs…on a cash basis’ (Sinclair, 2001: 105) and pursue American models of governance with an emphasis on privatisation (Sinclair, 2005). At the same time, credit rating agencies can inflict significant damage to a state’s credibility simply by downgrading its bonds (Cohen, 1996: 282). These examples show how organisations not only set the boundaries for which policies are deemed acceptable, but also how they direct governments policy choices by creating social facts which guide market participants incentives for action (Chweiroth & Sinclair, 2013: 474).

The argument that social facts impose strong constraints on the policy choice of states is evident throughout the OECD. A key example here is the movement towards central bank independence, in which states have tended to demonstrate their credibility to international markets by delegating monetary policy to an independent central bank that is insulated from political pressures and is focused on achieving low, stable inflation (Cohen, 1996: 284). Yet, the immobility of capital suggests that such tight measures are not required by states. Rather, it is the shared belief that financial markets will punish macroeconomic unorthodoxy that has pushed states towards transferring their monetary policy to independent central banks led by conservative central bankers (Watson, 2001: 87). This explains, in the absence of perfect capital mobility, why developed states have converged towards similar monetary policies and low inflation rates.

Indeed, the shared beliefs of policymakers may act to further the mobility of capital, thus enhancing the actual structural power of capital. Whilst it was previously argued that states could reverse the process of ICM, shared perceptions on capital mobility suggest that governments are ‘increasingly likely to imagine that the process of international financial integration has become largely inevitable and irreversible’ (Andrews, 1994: 201). Resultantly, these shared ideas have caused policymakers in the OECD to argue for a response to the increasing structural power of footloose capital, normally in the form of further financial liberalisation (Watson, 2001: 88), while the use of capital controls is labelled as ‘bad policy’ (Abdelal, 2007: 40). Thus, whilst it is possible for states to curtail ICM, the shared idea that ICM already imposes a strong structural constraint on countries is leading states to enact policies which will further enhance the mobility of capital and will reduce their policy choice in the future.

Yet, from a social facts perspective, much depends on the actions of policymakers and how they are able to interpret constraints and resist commonly held beliefs (Chweiroth & Sinclair, 2013: 459). Evidence shows that policymakers maintain ‘agential space’ (Bell, 2005: 84), in which they can choose their own policy direction. This was the case in Australia where the central bank pursued expansionary monetary policies and refused to prioritise low inflation despite ‘pressure from the markets’ (Bell, 2005: 71). Here, the bank committed to multiple goals, including growth and full employment, with emphasis put on supporting not only the interests of financial markets but also the broader community (Bell, 2005: 77). Similar dynamics have been observed in terms of fiscal policy, with French policymakers since the 1990s running high deficits and engaging in expansionary policies without facing penalties from financial market actors (Clift & Tomlinson, 2004: 531). These examples confirm the earlier argument that states can deviate from low inflation and low budget deficits without incurring punishment. They also demonstrate how policymakers can challenge social facts, choosing policies which go against the perceived preferences of capital in order to benefit wider society.

At the same time, states play an active role in shaping social facts, thus influencing perceptions of what constitutes a policy problem (Bell, 2005: 78; Chweiroth & Sinclair, 2013: 474). As such, states can create social facts which determine their own policy constraints. Such a dynamic can be seen in the realm of fiscal policy with the creation of the Maastricht criteria. Here, European states abandoned the ‘less is better’ view that had been used until the mid-1990s to assess government budget deficits (Mosley, 2000: 752). Instead, the Maastricht criteria specified that budget deficits should be held at 3% or less of GDP (Polasek & Amplatz, 2003: 667), thus setting a budget deficit ceiling. Resultantly, both European states and market participants adopted the idea that any budget deficit above 3% of GDP was problematic, with the Maastricht criteria becoming the standard by which states were to be judged (Mosley, 2000: 752). Thus, even to the extent that capital can move across borders, states play an active role in shaping perceptions and constructing their own room to move.

Conversely, perceptions of ICM, and the threat that it poses may act as an enabling force allowing states to enact certain policies which would otherwise be met with public discontent. From this perspective, governments can strategically adopt the conventional wisdom that footloose capital is a constraining force in order to push through unpopular policies (Watson, 2001: 90). Thus, by adopting the idea that capital will simply leave if its interests are not met, states can persuade the public that policies, such as lower corporation taxes, must be enacted to maintain jobs and economic growth. The use of ICM as a scapegoat for unpopular policies can be seen in the rhetoric of many OECD leaders, most recently in the US where the Trump administration enacted reforms that slashed corporate tax rates and largely exempts foreign profits from US taxation (Fernholz, 2018). Here, Trump stated that ‘under the American model we are reducing burdens on our businesses as long as they do business in our country’ (Jopson, 2017) with the idea that lower tax burdens on capital would allow the US to compete with China and attract investment, thus improving employment and the health of the economy (Osborne, 2017). Yet, critics argue that there is no evidence that taxation reforms will improve investment but will simply benefit the owners of capital whilst ordinary Americans continue to suffer (Stiglitz, 2017). Thus, whilst the preceding analysis focused on the constraints imposed on states by footloose capital, it is possible that ICM may increase the options available to developed states by acting as a scapegoat for unpopular policy reforms.


In conclusion, while the Capital Mobility Hypothesis has gained widespread support, it is shown here that its predictions are vastly overstated; ICM does not impose an overbearing structural constraint on developed states which forces them towards a specific policy set. Drawing on the work of Mosley, it is clear that developed states face much narrower constraints than developing nations. This is because investors take an information shortcut when evaluating developed countries, taking low default risk as a given and focusing on the countries rate of return. Resultantly, states are only constrained in that they must maintain low inflation rates and budget deficits; they maintain considerable autonomy in terms of micro-policy, including the composition of government spending and taxation. Yet, the lack of a distinct set of capital preferences suggests that states do not face significant pressure to pursue one set of policies, with some forms of capital benefiting from expansionary policies. Similarly, the imperfect mobility of both physical and financial capital suggests that states should not fear large capital outflows and can pursue ‘deviant’ policies, such as expansionary measures which increase inflation, without facing punishment from capital. Indeed, even to the extent that capital is mobile, it remains possible that states can impose capital controls in order to further restrict ICM. As such, this analysis suggests developed states maintain considerable policy autonomy and are largely unaffected by the forces of ICM.

However, ICM can impose tight constraints on the policy choice of states, even in the absence of considerable structural power. Here, the mere spectre of increased ICM means that states share the belief that capital has a distinct set of policy preferences which must be enacted or else they will be punished with large capital outflows. As such, ICM presents itself as a social fact, imposing a constraint as strong as if capital were perfectly mobile. International organisations and rating agencies have played a key role in creating these social facts, defining certain policy norms which market actors use to judge states and which states feel they must pursue in order to maintain credibility and attract capital inflows. This social fact perspective of ICM demonstrates why developed states increasingly converge towards certain policies, such as conservative monetary policy overseen by an independent central bank, even in the absence of perfect capital mobility.

Yet, much depends on the actions of policymakers, with states maintaining agential space in how they interpret and react to commonly held beliefs regarding ICM. Indeed, states play an active role in creating social facts themselves and can set the standards by which they are judged, as was the case with the creation of the Maastricht Criteria. At the same time, states can challenge the belief that deviation from policy norms will result in capital outflows, pursuing expansionary policies without facing punishment. Further, if states realise that they do not face a material constraint, they can strategically adopt the idea that capital will exit if its needs are not met in order to push through unpopular policy reforms.


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