A) Why do domestic governments often try to limit domestic flows of funds abroad for investment in foreign countries?

B) How did such limitations in the United States contribute to the development of the Eurodollar markets?

A)

Countries and their governments face many factors that affect the value of their currencies. One of the most common measures implemented by governments to face these issues is called capital control. This regulation aims to set a limit of flows of funds abroad for investment in foreign countries. Setting a limit of domestic capital outflows helps a currency to stabilize in case of an economic or political crisis. That is to say, governments and central banks try to avoid capital flights that result in the depreciation of the domestic currency.

B)

Eurodollars are deposits denominated in U.S. dollars that are held in operating banks or financial institution that are outside the U.S. Therefore, Eurodollars are not subject to the jurisdiction of the Federal Reserve which means that these time deposits have less regulations. Capital controls can be beneficial for the economy. However, it can also increase the political risk of a country which results in a type of barrier and lack freedom for investors. Thus, investors have seen Eurodollars as a safe tool to hold their money outside the U.S. without the fear to have restrictions and regulations such as capital controls.