Relaxation Of Capital Controls Research Articles

International Taxation, Globalization, and the Economic Digital Divide

ABSTRACT The past decade has witnessed the creation of a new international tax regime. The original international tax regime was created a century ago by the League of Nations. Until the 1980s, it functioned reasonably well and prevented most instances of double taxation and double non-taxation by allocating cross-border income between home and host jurisdictions based on a compromise reached in 1923. However, since the advent of globalization in the 1980s and digitalization in the 1990s, the original international tax regime ceased to function as intended. The main problems were the increased mobility of capital related to increased intangibility and digitalization, together with a relaxation of capital controls and increased tax competition. These developments posed a problem for countries that wished to leave their borders open to reap the benefits of globalization and to engage in tax competition to attract investment. The outcome was a significant fall in tax revenues that threatened the social safety net of the modern welfare state. The trilemma of open borders, tax competition, and satisfying voters’ demand for social insurance culminated in the financial crisis of 2008–09, where many countries were forced to implement austerity measures at the same time that parliamentary hearings, leaks, and media reports revealed that rich individuals and large corporations were paying very little tax on cross-border income. The results over the past decade have been the creation of a new international tax regime designed to curb both tax evasion by the rich and tax competition among countries seeking to attract business activity within their borders by granting various preferential tax provisions to multinational enterprises. The key question going forward is how the new international tax regime will deal with international (in)equity, i.e. the economic digital divide. In what follows, I will first discuss the decline of the original international tax regime from 1980 to 2009, then the creation of the new international tax regime from 2010 on, and finally the implications of the new international tax regime for the economic digital divide.

Capital control and monetary policy coordination: Tobin tax revisited

With the relaxation of capital controls and enriching capital flow channels, the potential negative impact of short-term capital flight on emerging market economies (EMEs), such as China, has been developing. This paper develops a small open-economy dynamic stochastic general equilibrium (DSGE) model to address the policy coordination between capital control and monetary policy, thereby introducing the Tobin tax on capital flow. We simulate the applicability of the Tobin tax and its collaboration with monetary policy in the context of crossborder capital flows triggered by external monetary policy spillovers. Regarding the capital outflow from EMEs caused by the external monetary policy, we find that “enterprises Tobin tax + interest rate cut” or “household Tobin tax + interest rate hike” can prevent capital outflow. Based on the welfare analysis, we find that the former is more feasible. The simulation results suggest that although the Tobin tax can ease the pressures on monetary authority by restraining short-term capital outflows, its ability to stabilize the financial markets is limited.

Defined Benefit Pension Plan Liabilities and International Asset Allocation

Despite the integration of international capital markets and the relaxation of capital controls, U.S. defined benefit pension plans do not sufficiently diversify their assets across international holdings. In this paper, we explore whether incorporating liabilities in the asset allocation decision can help explain pension plans' home bias. We find that incorporating pension liabilities proves not to explain pension plan home bias in the case when returns are nominal. Furthermore, when we focus on real returns, incorporating pension plan liabilities makes the home bias puzzle worse. The fact remains that U.S. defined benefit pension plans could benefit substantially from more international investment.

Financial Openness and Total Factor Productivity Growth

[enter Abstract Body]Using a panel data set of 89 countries from 1995 through 2014, the effects of financial openness, both in general and by direction of foreign capital flows, on changes in total factor productivity growth in the economy are estimated. An overall positive relationship is found between financial openness and total factor productivity growth. The positive effect of financial openness is driven by relaxation of capital controls on foreign inflows. and on the level of domestic capital market development, with the majority of the benefits falling to countries whose credit markets are less developed. For countries with developed capital markets, we document that at a certain level of development that financial controls on capital inflows and outflows can have positive effects on total factor productivity growth at differing stages of development.

Do countries compete over corporate tax rates?

This paper investigates whether OECD countries compete with each other over corporation taxes, and whether such competition can explain the fall in statutory tax rates in the 1980s and 1990s. We develop a model in which multinational firms choose their capital stock in response to an effective marginal tax rate (EMTR), and simultaneously choose the location of their profit in response to differences in statutory tax rates. Governments engage in two-dimensional tax competition: they simultaneously compete over EMTRs for capital and over statutory rates for profit. We estimate the parameters of their reaction functions using data from 21 countries between 1982 and 1999. We find evidence that countries compete over both measures, and moreover, that the estimated slopes of reaction functions are consistent with our theoretical predictions. We find that – consistent with our model, but not some other forms of competition – evidence of strategic interaction is present only between open economies (i.e. those without capital controls in place). The Nash equilibrium average statutory rates implied by the empirical model fall substantially over the period, in line with falls in actual statutory rates. The reductions in equilibrium tax rates can be explained almost entirely by more intense competition generated by the relaxation of capital controls.

Are Australia's Current Account Deficits Excessive?

This paper compares the evolution of the Australian current account balance over the period 1954–94 against an optimal current account derived from a consumption-smoothing model. The findings indicate that the Australian current account was not used to smooth consumption optimally in the period prior to the relaxation of capital controls in the early 1980s. The results also suggest that in the period since the mid-1980s Australia’s current account deficits have become excessive, and that the increase in national saving required to satisfy its external borrowing constraint is about 2 to 4 percent of GDP.

The Term Structure of Interest Rates Among G7 Countries

This study considers the interdependence and integration of G7 term structures for the period following 1974–92. Using a variety of bivariate and multivariate econometric techniques, it would appear that we have at best only slight evidence that the 1980s has brought the G7 term structures closer together. This is despite the creation of the ERM, the relaxation of capital controls on the part of Japan and the UK, and much greater concern with policy co-ordination and exchange rate management of the US dollar. However, within the G7 there is evidence that term structures have become more closely aligned within certain groups, i.e. the EU members and between Canada and the US. [E43]

Japanese capital outflows

This paper investigates the causes of large Japanese long-term capital outflows in the 1980s. It is found that exchange rate expectations and international interest rate differentials explain part of the capital outflows until the mid 1980s, but not all. More significant were relaxation of capital controls and the rapid growth of institutional investors. Since the mid 1980s exchange rate expectations have exerted negative impacts on capital outflows. These have been more than offset by further relaxation of capital controls in 1986. However, the effects of deregulation are now close to over. Throughout the period increases in domestic wealth have been an important cause of capital outflows.

Financial Market Integration and Exchange Rate Policy

This paper examines how a country’s exchange rate policy should be adjusted when the degree of integration between domestic and external financial markets increases as a result of both domestic financial liberalization and the relaxation of capital controls. As the financial structure is opened and liberalized, the optimal scale of exchange market intervention changes as the relative importance of different domestic and foreign shocks for output and price stability is altered. Nonetheless, the response of the optimal degree of intervention to increases in the variances of the various domestic and foreign shocks is similar across all financial structures.

Financial Market Integration and Exchange Rate Policy

This paper examines how a country’s exchange rate policy should be adjusted when the degree of integration between domestic and external financial markets increases as a result of both domestic financial liberalization and the relaxation of capital controls. As the financial structure is opened and liberalized, the optimal scale of exchange market intervention changes as the relative importance of different domestic and foreign shocks for output and price stability is altered. Nonetheless, the response of the optimal degree of intervention to increases in the variances of the various domestic and foreign shocks is similar across all financial structures.

Liberalization Policies and Welfare in a Financially Repressed Economy

This paper studies the effect on welfare of three types of liberalization policy (financial deregulation, relaxation of capital controls, and trade liberalization) assuming, realistically, that in the short run all markets cannot be liberalized simultaneously. An intertemporal general-equilibrium model with two traded goods is utilized to show that partial reforms, which in the long run are beneficial, may well result in welfare losses in the short run. In particular, contrary to the standard view, raising the deposit rate may reduce welfare in the presence of tariffs, while tariffs can raise welfare when financial repression discourages saving.

Liberalization Policies and Welfare in a Financially Repressed Economy

This paper studies the effect on welfare of three types of liberalization policy (financial deregulation, relaxation of capital controls, and trade liberalization) assuming, realistically, that in the short run all markets cannot be liberalized simultaneously. An intertemporal general-equilibrium model with two traded goods is utilized to show that partial reforms, which in the long run are beneficial, may well result in welfare losses in the short run. In particular, contrary to the standard view, raising the deposit rate may reduce welfare in the presence of tariffs, while tariffs can raise welfare when financial repression discourages saving.