Short-Term Capital Movements of the United Kingdom, 1963-1967

Abstract

The paper is addressed to the problem of estimating determinants of capital movements under conditions of substantial destabilizing speculation. Some methodological problems are discussed, and then a stock-adjustment model is presented. Regression results with uncovered interest differentials as variables suggest that U.K. short-term capital flows were sensitive to changes in interest rates and in trade flows and to speculation. Analysis with covered interest differentials shows that forward cover is largely determined by speculation. The latter analysis confirms the efficiency of the British capital market but is unable to separate contributions of individual forces.