wordpress-themes.org wordpress themes wordpress themes

June, 2014

now browsing by month

 

THE GLOBAL CAPITAL MARKET: Market Failures and the Policy Response 6

1316163138_1258375261
If more effective supervision proves impossible for a country, then there is a second-best case for limiting foreign capital inflows through taxes on capital imports, foreign deposit requirements, or similar measures. The possible moral hazard problem raised by fixed exchange rates suggests an argument for exchange-rate flexibility (Mishkin, 1996). By purposely leaving some scope for unexpected exchange rate movements and avoiding implicit exchange-rate guarantees, the authorities can induce domestic borrowers to internalize at least some of the costs of failing to hedge appropriately. Other steps that would reduce the scope for crises would be more foreign equity ownership in developing countries, and particularly ownership of developing-country financial institutions, coupled with greater representation in financial sectors of foreign-based intermediaries. These developments would have the side-benefit of reducing the perceived chance of government bailouts.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Market Failures and the Policy Response 5

Similar patterns can be seen in east Asia. As the IMF observes concerning Thailand (Folkerts-Landau et al., 1997, p. 46):

While banks are believed to have hedged most of their net foreign liabilities, the opposite is believed to be true for the corporate sector. The combination of a stable exchange rate and a wide differential between foreign and (much higher) domestic interest rates provided a strong incentive for firms to take on foreign currency liabilities . . . . Hence, in addition to their own foreign exchange exposure, banks may have a large indirect exposure in the form of credit risk to firms that have borrowed in foreign currencies.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Market Failures and the Policy Response 4

Business_money-143
The attempt to assure fixed exchange rates (or a preannounced ceiling on exchange depreciation) can lead to the very vulnerabilities that raise the possibility of an international credit crisis. When domestic banks and corporate borrowers are (over)confident in an exchange rate, they may borrow dollars or yen without adequately hedging against the risk that the domestic currency will be devalued, sharply raising the ratio of their domestic-currency liabilities to their assets. They may believe that even if a crisis occurs, the government’s promise to peg the exchange rate represents an implicit promise that they will be bailed out in one way or another. Borrowers may face little risk of personal loss even if a bailout does not materialize.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Market Failures and the Policy Response 3

Crises in the Capital Markets

The year 1982 marked the start of a global developing-country debt crisis. Private lending to the affected developing countries, many of them in Latin America, slowed to a reluctant trickle, while sovereign debtors and their creditors teetered on the edge of generalized default. But in the 1990s, the debt crisis gave way to renewed capital inflows, as a combined result of workouts of the old debt problems, widespread economic reforms, and low American interest rates (see Calvo, Leiderman, and Reinhart, 1996).

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Market Failures and the Policy Response 2

DETAIL_PICTURE_553610
What explain the apparent failure of people to take full advantage of such an obvious opportunity for mutual gain? Nobody knows. Part of the puzzle could reflect the fact that increasingly the profit streams associated with “domestic” companies in fact reflect production operations abroad. And foreign direct investment is indeed substantial. People can and do diversify abroad by holding foreign non-equity assets. In addition, estimates of supposedly optimal portfolios are quite imprecise, and can encompass wealth allocations heavily skewed toward home-based industries. Nonetheless, the weight of the evidence suggests significant unexploited diversification opportunities (Lewis, 1997).

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Market Failures and the Policy Response

I have argued that the international capital market has the potential to yield great benefits, but that it also constrains national choices over monetary and fiscal policies, and may facilitate excessive borrowing. To what extent is the positive potential of the international capital market outweighed by a potentially disruptive role? Are there policy reforms or institutional changes that might improve the balance of benefits and costs? Here, I discuss three facets of the debate: the very low degree of international diversification of equity portfolios; the problem of international capital-market crises, much in the news recently; and the role of the IMF as an international emergency lender.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Fiscal Autonomy and Income Distribution 5

kuendigungsfrist-darlehen_640
A vital corollary is that import restrictions cannot prevent factor-price convergence when capital markets are open. Since capital seeks out its most remunerative global use, trade restrictions provoke large-scale capital movements that equalize factor prices directly, and simultaneously eliminate the gains from commodity trade.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Fiscal Autonomy and Income Distribution 4

fond-480x350
If tax competition nonetheless emerged as a threat to social cohesion or to free trade, formal international tax coordination might begin to appear attractive, despite the daunting difficulties in reaching a deal geographically comprehensive enough to be effective.

Debate on the changing distribution of United States wages and rising European unemployment has focused on imports from low-wage countries (as discussed in Feenstra’s contribution to this symposium). In principle, however, capital movements and commodity imports can have identical effects on wages, as shown in a classic analysis by Mundell (1957), which raises the possibility that the global capital market, in addition to hindering governments’ provision of social insurance, might increase inequality and raise the need for those same insurance services.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Fiscal Autonomy and Income Distribution 3

Looking at the effects of international tax competition so far, it is hard to argue that we see anything close to equivalent overall capital tax rates across countries, or equivalent levels of social spending. For example, Germany, which has long had an open capital account, devoted 21.2 percent of its GDP to government social security payments and transfers in 1995, compared to 13.9 percent in the United States. The ratio for France was 25.7 percent in the same year. S0rensen (1993) observes that proceeds from the corporate income tax did not fall over the 1980s in industrial countries, either as a share of GDP or of total revenues, despite generally lower statutory tax rates. The reason was a broadening of the corporate tax base.

Read the rest of this page »

THE GLOBAL CAPITAL MARKET: Fiscal Autonomy and Income Distribution 2

i
How Great is the Threat to National Autonomy?

Many observers fear that the constraint of financial openness poses a dilemma for fiscal policy: either the burden of providing necessary social services must be shifted toward labor, or those services must be scaled back. Rodrik (1997), for example, argues that greater economic openness is associated with greater uncertainty over consumption, especially for workers, who at best can insure very little of their income in markets. Government expenditure and social support programs, Rodrik contends, have evolved to provide substitute insurance against those risks and others. He presents regression evidence suggesting that greater openness leads to lower taxes on capital and higher taxes on labor, and that capital-account restrictions have allowed heavier capital taxation. Rodrik foresees that the downward leveling of capital taxes will either raise the tax burden on labor to politically unacceptable levels, or else compromise the social and worker protection programs that, in his view, have allowed countries gradually to lower trade barriers over the postwar period. A popular backlash against free trade might result.

Read the rest of this page »

Pages: 1 2 Next