Degree Of International Capital Mobility Research Articles

An Appraisal of Alternative Ricardian Trade Models

ABSTRACT A prevalent feature of the global economy is the relevance of trade in intermediates due to production fragmentation. This phenomenon has led to the revival and development of trade models that include inter-industry relations. A wide variety of Ricardian trade models cope with this feature. In this article, we develop a Sraffa-Leontief framework to compare and appraise these models. The models are distinguished by their underlying theory of distribution and the assumptions about the degree of international capital mobility. We compare the predicted effects on employment and the distribution of domestic income. Furthermore, we assess if the model assures the existence of a shared trade pattern, i.e., if it can ensure that all countries engage in trade (as the principle of comparative advantage predicts). It follows from our appraisal that it is not warranted that all countries can engage in international trade, even if they want to. In other words, if allowed to work, the ‘strong balancing forces’ may not make a country internationally competitive in a world with production fragmentation.

Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan


 
 
 
 
 The exchange rate is one of the most important channels of monetary policy transmission to the real economy. However, the effectiveness of this channel depends on the extent of exchange rate flexibility, degree of international capital mobility, and inflation expectations. Like other emerging economies, Pakistan is typically characterised by weak fiscal and monetary institutions, currency substitution, liability dollarisation, and vulnerability to sudden stops of capital flows. These features compel emerging economies to follow managed exchange rate regimes by restricting the mobility of capital flow. All these factors weaken the effectiveness of the exchange rate channel of monetary policy transmission. This study estimates the effectiveness of the exchange rate channel in monetary policy transmission in Pakistan and explores the impact of exchange rate regimes on the channel’s strength. The study benefitted from the widely used structural VARs methodology and found that the exchange rate channel is less effective in transmitting monetary policy shocks to the real economy. In recent years, however, greater flexibility in the exchange rate has improved the effectiveness of this channel.
 
 
 
 

Growth and optimal policies in an R&D‐growth model with imperfect international capital mobility

AbstractIn this paper, we examine the effects of international capital mobility on innovation, growth, and optimal growth policies in a small open economy with R&D‐driven growth. Households can borrow funds from an imperfect international capital market to finance their investment in R&D firms. We show that the economy can reach a higher growth rate if international capital is more mobile. This result is consistent with recent empirical findings. Moreover, we show that the common growth‐enhancing policies, such as patent protection and the R&D subsidies, have an additional negative welfare effect when households can access the international capital market. Accordingly, the optimal patent protection and R&D subsidy should be smaller when the degree of international capital mobility is higher.

Exchange Rates and Insulation in Emerging Markets

The insulating properties of flexible exchange rates have long been a highly contentious issue in emerging markets—not least in Asian emerging markets. A number of recent theoretical and empirical studies question whether a trade-off exists between rigid exchange rate regimes and insulation from foreign shocks when the degree of international capital mobility is high. On the other hand, Obstfeld et al. (2017) find that countries with flexible exchange rate regimes experience less real and financial instability in the face of global financial volatility. We contribute to this empirical debate by significantly extending their analysis. Overall, our findings are broadly consistent with their results, suggesting that flexible exchange rate regimes are better at insulating emerging markets from external shocks. There are, however, a few subtle differences. In particular, we find somewhat less robust evidence that limited flexibility is enough to insulate emerging markets from shocks.

Exchange Rates and Insulation in Emerging Markets

The insulating properties of flexible exchange rates have long been a highly contentious issue in emerging markets—not least in Asian emerging markets. A number of recent theoretical and empirical studies question whether a trade-off exists between rigid exchange rate regimes and insulation from foreign shocks when the degree of international capital mobility is high. On the other hand, Obstfeld, Ostry, and Qureshi (2017) find that countries with flexible exchange rate regimes experience less real and financial instability in the face of global financial volatility. We contribute to this empirical debate by significantly extending their analysis. Overall, our findings are broadly consistent with their results, suggesting that flexible exchange rate regimes are better at insulating emerging markets from external shocks. There are, however, a few subtle differences. In particular, we find somewhat less robust evidence that limited flexibility is enough to insulate emerging markets from shocks.

TAX REFORM IN QUÉBEC: AN ALTERNATIVE VISION

Recent evidence indicates that income and wealth inequality have been increasing, while the tax-transfer system has not responded. If anything, progressivity has decreased and capital income has become increasingly sheltered. Arguably, a significant amount of the increase in inequality reflects windfall gains or rents to various taxpayers, both individuals and firms. Recent proposals by the Mirrlees Review, drawing on lessons from optimal tax analysis, include some ways that the tax system can be reformed to tax windfall gains, albeit in a context limited by distribution-neutrality. We propose a tax reform agenda for Québec and Canada that can both improve efficiency and fairness. Our proposals contrast with those of the Québec Taxation Review Committee.In our view, there is a strong case for taxing capital income as part of redistribution policy, in part because capital income includes unexpected gains, or rents, that accrue disproportionately to high-income persons. Our preferred treatment of capital income at the personal level would include the following. First, strict limits on tax sheltering should be maintained to ensure that some capital income is taxable for high-income persons. Contribution limits should be more generous for RRSPs than for TFSAs given that unexpected returns are taxed under the former but exempted under the latter. Second, capital gains on housing, above some lifetime exemption level, should be taxed. Third, a tax on large inheritances should be introduced to reduce the intergenerational transmission of wealth inequality and promote equality of opportunity.At the corporate level, we recommend a fundamental change in the role that the system is meant to play. The current system, which is designed to serve as a withholding device for the personal tax by taxing shareholder income at source, should be replaced by a cash-flow tax system, or equivalently a rent-based corporate tax. This recommendation is motivated by the fact that the corporate tax on normal risk-adjusted return is largely shifted to labour given the high degree of international capital mobility. Moreover, the withholding role of the corporate tax has become unnecessary given that most capital income is now sheltered from the personal tax. Among the different cash-flow equivalent taxes available, the allowance for corporate equity tax would be the easiest to implement. It would simply involve adding a deduction for the cost of equity finance at the risk-free interest rate in addition to the deductions for interest and depreciation that currently exist. The adoption of a cash-flow equivalent tax would mitigate the disincentives for investment, innovation and growth that the current system imposes. As well, it would eliminate the incentive to finance investment by debt.In addition, we argue that the integration of the personal and corporate income taxes has become largely unnecessary. Therefore, we recommend eliminating the dividend tax credit and the preferential treatment of capital gains. Doing so would also offset the revenue cost of adopting a rent-based corporate tax.The same tax base should apply to incorporated and unincorporated businesses. The small business deduction should be maintained, given that it compensates for the imperfect refundability of tax losses for bankrupt firms. However, cumulative lifetime limits should be adopted so firms are not rewarded for staying small.Increased income inequality calls for more progressivity of the tax system both at the top and bottom of the income distribution. This could be achieved by adding a new tax bracket for the top decile of taxpayers and making all tax credits refundable.To maintain some harmonization, these reforms should ideally be adopted by both orders of government. However, several proposals could be adopted unilaterally by the Québec government with relatively little difficulty.

Foreign buyers and housing price dynamics

This paper analyzes the short- and long-run effects of foreign buyers on housing prices in an open economy with the flexible exchange-rate system. In the long run, the changes in housing prices depend on the price elasticity of foreign buyers’ housing demand, while the adjustments in the exchange rate depend on the degree of international capital mobility. Nonetheless, in the short run, the changes in housing prices and exchange rates can be over- or under-shot or mis-adjusted, dependent partly on the length of time between the policy announcement and its implementation. The housing prices could fall in the short run if foreign housing demand is price-elastic, while the exchange rates could be over-shot if capital is less mobile.

International mobility of capital, wage indexation, and the cost of policy mistakes under ambiguity: a CGE evaluation

In this paper we focus on the role institutions and structural parameters play in macroeconomic policy design and test the differential effects of tax policies on two structural parameters: the degree of international capital mobility and the rules of wage indexation practiced in the economy. We evaluate counterfactual changes in taxation in the Argentine economy using a Computable General Equilibrium (CGE) Model with unemployment, calibrated with 2006 data, showing that policy mistakes (diagnosis failures) are costlier when the degree of capital mobility is greater and the rules to determine salaries could amplify the losses. Among other taxes, we evaluate the choice of export taxation, historically one of the preferred revenue sources of Argentine governments. We discuss the choice of taxes that an optimistic and a pessimistic policymaker will make under Knightian uncertainty and find that, in the case of our CGE, an optimistic policymaker prefers to tax export goods, while a more pessimistic one tends to tax imports or non-tradable goods.

International Capital Mobility and Saving-Investment Nexus in Nigeria: Revisiting Feldstein-Horioka Hypothesis

This paper tests the validity of Feldstein-Horioka (1980) hypothesis using Nigerian data from 1980 to 2013 by relying on the ARDL Bounds testing approach to co-integration and vector error correction model (VECM). Evidence for the hypothesis over the sub-samples is mixed given absence of co-integrating relationship between savings and investment in both periods. Over the period of market-friendly economic reform (1986 -2013) and entire sample period (1980-2013), we found low saving investment correlation indicating support for the F-H hypothesis (that low saving investment relationship implies high degree of international capital mobility). Presumably, the World Bank and IMF designed economic reform programs in form of liberalization and deregulation – coupled with the neo-liberal economic management framework that Nigeria is currently practicing – may have attenuated the saving investment relation in the reform era, thereby providing support for F-H hypothesis over the reform era. But the finding of similar absence of cointegration between saving and investment in the pre-reform era, against the F-H postulate, reveals the importance of incorporating factors such as money supply and inflow of foreign capital that could affect the saving investment relationship as widely suggested in the literature. Overall, we find support for high degree of international capital mobility across Nigerian borders that may lead to unsustainable current account balance for the economy if left unregulated. The policy import of the paper is the need for a more conscientious implementation of a policy of guided deregulation of Nigeria’s capital and trade accounts.

International Capital Mobility and Saving-Investment Relationship in the Newly Industrialized Countries

This paper investigates the Feldstein-Horioka coefficients and evaluates the degree of international capital mobility for ten newly industrialized countries (NICs) over the different sub-periods from 1970 to 2010. By applying the Pedroni and Westerlund cointegration tests, we find that saving and investment are indeed cointegrated. The estimated FH coefficients using FMOLS and DOLS are 0.24 and 0.33, respectively, for the period 1970–1980. Furthermore, the estimated FH coefficients reduce from 0.80 (FMOLS) in 1991–2000 to 0.36 (FMOLS) in 1970–1980. The small FH coefficients suggest that international capital mobility increased in the NICs during the sub-periods 1970–1980 and 2001–2010.

Does size asymmetry exacerbate the inefficiency of tax competition?

Many authors demonstrate that the tax gap resulting from tax competition increases with the size asymmetry of the competing countries. Consequently, increasing country-size disparities exacerbates the inefficiency of tax competition. The aim of this note is to show that this classical view has no general validity, if we consider that countries compete not only in taxes, but also in the provision of infrastructure. The simple model we develop for this purpose demonstrates that the effect of size disparity on efficiency depends crucially on the degree of international capital mobility.

Does Size Asymmetry Exacerbate the Inefficiency of Tax Competition?

Many authors demonstrate that the tax gap resulting from tax competition increases with the size asymmetry of the competing countries. Consequently, increasing country-size disparities exacerbates the inefficiency of tax competition. The aim of this note is to show that this classical view has no general validity if we consider that countries compete not only in taxes but also in the provision of infrastructure. The simple model we develop for this purpose demonstrates that the effect of size disparity on efficiency depends crucially on the degree of international capital mobility.

International capital mobility: What do national saving–investment dynamics tell us?

We interpret the relationship between national saving and investment in the long-run as reflecting a solvency constraint, and interpret the ease with which a country can run current account imbalances in the short run, before it has to ultimately reverse the transaction at some future date to satisfy the solvency constraint, as being positively related to the degree of international capital mobility. We apply panel error-correction techniques to data for 20 OECD countries from 1960 to 1999. We find that saving and investment display a long-run cointegration relationship that is consistent with the interpretation that a long-run solvency constraint is binding for each country. Over time, however, deviations from this long-run equilibrium relation have become more persistent, which suggests that capital mobility has increased.

Assessing International Capital Mobility in East Asian Economies: A Panel Error-Correction Approach

This study assesses financial integration and the degree of international capital mobility in the East Asian region by analyzing the dynamics of national saving-investment relationships. Following the work of Pelgrin & Schich (2004), we interpret the close relationship between national saving and investment in the long run reflecting a solvency constraint and focus on the short term saving investment analysis relationship to assess the degree of capital mobility. Applying the panel error – correction technique proposed by Pesaran et al. (1999), our empirical results suggest that there exists a long-run relationship between saving and investment and that the short-run is driven by the extent of the gap between current and long-run equilibrium values. The low estimated values of the short-run coefficient of the changes in the saving rate signal some degree of capital mobility.

The role of financial development in economic growth: The experiences of Taiwan, Korea, and Japan

Since the financial crisis broke out in East Asia, the importance of financial development and stability had been noted. This paper tries to examine the relationship between financial development and the source of growth for three Asian economies, namely, Taiwan, Korea, and Japan. Particularly, we wish to emphasize the role of financial development and structure (including banking and stock markets), monetary and financial policies, as well as the degree of international capital mobility in the economic growth processes. Using the generalized method of moments (GMM) and principal component analysis, we find that (1) high investment had accelerated economic growth in Japan, while high investment to GDP ratio did not necessarily lead to better growth performance if investment did not have been allocated efficiently, e.g. in Taiwan and Korea cases; (2) real export growth rate had contributed to Taiwan and Korea; (3) the finance-aggregate had positive effects on Taiwan's economy, but had negative effect on other countries; (4) the stock market development had positive effects on Taiwan's economic growth; (5) Taiwanese economy suffered less from the Asian financial crisis; (6) after foreign exchange deregulation, capital outflows had negative effects on all three economies, while the effect of capital inflows is negative but insignificant.

Saving, investment and international capital mobility in East Asia

This paper estimates the degree of international capital mobility in East Asia using the saving–investment correlation originated in Feldstein and Horioka [Feldstein, M., Horioka, C., 1980. Domestic saving and international capital flows. Economic Journal 90, 314–329]. We apply the empirical method used in Kim [Kim, S.H., 2001. The saving–investment correlation puzzle is still a puzzle. Journal of International Money and Finance 20, 1017–1034] to control for cyclical effects in estimating a time-series saving–investment correlation of 10 Asian countries from 1980 to 2002. Our conclusion is that the saving–investment correlation in East Asia steadily decreases over time but is still higher than that of the OECD countries over all studied periods. These results are consistent with the fact that capital mobility in East Asia is lower than that in the OECD countries. In addition, regional saving and investment data demonstrate that investment in East Asia is largely financed by regional savings.

Capital Mobility, Consumption Substitutability and the Effects of Monetary Policy in Open Economies

Abstract I use a dynamic general equilibrium two-country optimizing model to analyze the implications of international capital mobility for the short-run effects of monetary policy in an open economy. The model implies that the substitutability of goods produced in different countries plays a central role for the impact of changes in the degree of international capital mobility on the effects of monetary policy. Paralleling the results of the traditional Mundell-Fleming model, a higher degree of international capital mobility magnifies the short-run output effects of monetary policy only if the Marshall-Lerner condition, which is linked to the cross-country substitutability of goods, holds.

ON THE POLITICAL ECONOMY OF IMMIGRATION AND INCOME REDISTRIBUTION*

In this article, we analyze an economy in which agents vote over immigration policy and redistributive tax policy. We show that natives' preferences over immigration are influenced by the prospect that immigrants will be voting over future tax policy. We also show that changes in the degree of international capital mobility, the distribution of initial capital among natives, the wealth or poverty of the immigrant pool, and the future voting rights and entitlements of immigrants can have dramatic effects on equilibrium immigration and tax policies. Finally, we provide some empirical support for the model's predictions.

National Saving-Investment Dynamics and International Capital Mobility

Les auteurs etudient la dynamique de la relation entre l'epargne et l'investissement national pour determiner le degre de mobilite internationale du capital.

A panel cointegration approach to the investment-saving correlation

This paper augments the empirical literature concerning the Feldstein-Horioka puzzle using non-stationary panel data. Recently developed tests for panel cointegration and panel unit root tests are employed. We find substantial evidence to support the hypothesis of no cointegration in this panel, implying a high degree of international capital mobility. Our results suggest that tests for cointegration in panel data provides a better methodological focus than the magnitude of saving-retention coefficients.