Redistribution, Fiscal Competition, and the Politics of Economic Integration

The paper examines the consequences of the economic integration of factor markets in a model with two countries that redistribute income among their residents. The social benefits in each country are financed by a source based tax on capital which is democratically chosen by its inhabitants. If either capital or labour is internationally mobile, the countries engage in fiscal competition and the partial integration of capital or labour markets is detrimental to the countries' redistributive ability. A move from partial to full integration, however, may alleviate rather than intensify fiscal competition, particularly, if the two countries face sufficiently similar economic and political conditions. In such a situation, for example, tax competition for mobile capital is softened as the labour market becomes more integrated and even vanishes if both factors are fully mobile. As a result, there is more redistribution in equilibrium and a majority of the population in each country is strictly better off.     

Does Financial Sector Development Augment Cross-Border Capital Flows?

ABSTRACT

The sharp increase in volatility of capital flows in recent years has resulted in many countries altering the regulations governing the flow of foreign capital only to find such changes having a limited impact. We postulate that one reason for the limited effectiveness of such changes in regulations is the level of financial sector development in the country. As a country enhances its level of financial sector development, it also develops more and more sophisticated financial instruments. The more advanced the domestic financial instruments are, and the deeper is the integration of the domestic financial markets with the world markets, the greater is the likelihood of developing strategies to bypass capital account management measures. In this paper, we use various empirical techniques to identify the impact of financial sector development on capital flows, after accounting for regulatory regime. The empirical results indicate that there is a threshold effect in the financial sector development capital flow relationship. In particular, financial sector development augments greater integration with global capital flows only above a threshold level. Below the threshold level we find financial development reduces the extent of integration with global capital markets.     

Aging, Asset Markets, and Asset Returns: A View From Europe to Asia

The extent of the demographic changes is dramatic especially in some Asian and European countries. This paper investigates the effect of aging on global asset markets and asset returns, focusing on markets for productive capital, and especially on interactions between European and Asian economic development. Aging has complex effects on the markets for real capital. If elderly people save less than younger people, interest rates will increase. At the same time, however, the younger generation becomes smaller, which reduces the demand for new investment. The equilibrium effect is thus uncertain. Our multicountry computational equilibrium model delivers a subtle picture: there will be some decline in the return from productive capital, but it is relatively small. We find noticeable interaction effects between labor market and pension reforms in Europe on the one hand, and the demographic and economic developments in Asia, especially India and China, on the other hand.     

The ‘real’ explanation of the Feldstein–Horioka puzzle

This article shows that global capital markets cannot, by themselves, achieve net transfers of financial capital between countries and that both the integration of global financial markets and the integration of global goods markets are needed to achieve net transfers of capital between countries. Frictions (barriers to mobility) in one or both of these markets can impede net transfers of capital between countries, produce the Feldstein and Horioka (1980) results and prevent real interest rates from being equalized across countries. Moreover, there is empirical evidence that barriers to the mobility of goods and services are an important obstacle to international capital mobility.     

Innovation,Imitation, and Intellectual Property Rights with International Capital Movement

This paper extends the established Helpman (1993 ) model by introducing international capital movement, and obtains new results concerning the welfare implications of tightening intellectual property rights (IPR) in the South. First, if separated capital markets in the North and the South are integrated, enforcement of IPR would have more desirable welfare effects in both regions. Second, when international capital movement is allowed, the North always gains from the tightening of IPR if the imitation rate is sufficiently high. This implies that the North's demand on the South to tighten IPR becomes stronger as the integration of international capital markets progresses.     

A general equilibrium analysis of financial regulation

This paper utilizes a general equilibrium approach to investigate the factor returns and output effects on a regulated and unregulated sector from imposition of a rate of return on investment regulatory constraint. The results differ from those of the ‘traditional’ partial equilibrium model of the regulated firm as originally developed by Averch and Johnson (AJ). The differences are explained by the fact that the general equilibrium approach assumes the existence of efficient capital markets whereas the AJ approach does not. Introduction of the competitive capital market framework in the study of financial regulation through the general equilibrium methodology is this paper's major contribution.     

Optimal Factor Taxation under Wage Bargaining: A Dynamic Perspective

Abstract. We consider the issue of steady-state optimal factor taxation in a Ramsey-type dynamic general equilibrium setting with two distinct distortions: (i) taxes on capital and labour are the only available tax instruments for raising revenues and (ii) labour markets are subject to an inefficiency resulting from wage bargaining. If considered in isolation, the two distortions create conflicting demands on the wage tax, while calling for a zero capital tax. By combining the two distortions, we arrive at the conclusion that both instruments should be used, implying that the zero capital tax result in general is no longer valid under imperfectly competitive labour markets.     

Growth and equilibrium indeterminacy: the role of capital mobility

Summary. The paper presents a human capital driven endogenous growth model which, in general, permits a multiplicity of equilibrium balanced growth paths. It is shown that allowing for perfect capital mobility across countries increases the range of parameter values for which the model permits equilibrium indeterminacy. As opposed to the closed capital markets case, simple restrictions on preferences are no longer sufficient to eliminate the indeterminacy. Intuitively, under perfect capital mobility agents are able to smooth consumption completely. This induces an economy with open capital markets to behave like a closed economy with linear preferences thereby increasing the possibility of equilibrium indeterminacy. Received: 18 November 1998; revised version: 10 August 1999     

Housing, Land Prices, and Growth

We consider the effects of land for housingon the growth process within an overlapping generations model.Our original interest was to enquire whether the introductionof land into a growth model might account for a ``virtuous'circle in which saving-up for land (or housing) generates growthand higher land prices, generating further increases in saving,and so on. Such an account is sometimes proposed for high savingrates in East Asia, where mortgage markets are limited or absent.Our analysis does not support such a story. The user cost ofland reduces the resources available for consumption of reproduciblegoods, so that the introduction of intrinsically valuable landinto a growth model lowers the equilibrium stock of capital andraises the equilibrium interest rate. On the asset side, thepresence of land causes life-cycle savings to be reallocatedaway from productive capital towards land. The social optimumin such a model is for land to be nationalized and provided atzero rent. Land markets, far from generating saving and growth,are inimical to capital formation.     

The ‘real’ explanation of the PPP puzzle

This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalization across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalization across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high-saving-investment correlations and prevent real interest rates from being equalized across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from purchasing power parity (PPP) for extended periods of time and can therefore also explain the PPP puzzle. Consequently, we are able to resolve two of Obstfeld and Rogoff’s (2000) ‘6 major puzzles in macroeconomics’ with essentially the same explanation.     

Debt, interest rates, and integration of financial markets

It is commonly believed that higher budget deficits raise interest rates. However, these crowding out effects of increasing public debt have usually been found to be small or non-existent. One explanation is that on globalised bond markets interest rate differentials are offset due to financial integration. This paper tests crowding out, and measures the degree of integration of government bond markets, using spatial modelling techniques. Our main finding is that the crowding out effect of public debt on domestic long term interest rates is small: a 1% increase in the debt ratio pushes up domestic rates by 2 pp at most. Financial integration implies an important spillover effect via international bond markets, but only between OECD, and in particular EU, countries. The feedback effect from these markets on long term interest rates is as important as the domestic crowding out effect of higher public debt. Emerging markets are not as well integrated into international capital markets, causing a stronger crowding out effect.     

不完全市场、不确定性和中国利息税

通过建立具有利息税的不完全市场一般均衡模型对中国均衡利率和均衡资本进行分析,我们可以看到,利息税使得储蓄更低而利率更高。但是,流动性约束和预防性储蓄等不完全市场因素的存在使得资本供给曲线显著向右移动,导致储蓄增高。因此,当我们评价利息税对经济的影响的时候,必须考虑流动性约束和预防性储蓄的逆向作用。     

Welfare impacts of equal-yield tax reforms in the UK economy

A multisectoral dynamic general equilibrium tax model with and without announcement effects for open and closed capital markets is used to evaluate efficiency gains and transitional effects from equal-yield tax reforms for seven different taxes in the UK economy. Impacts of an unanticipated tax reform on investment, capital accumulation, output and employment are compared to those of anticipated tax reforms. Households, producers, traders, investors and the government are found to be more capable of adjusting their economic behaviour when tax announcements are made in advance. In equal-yield tax experiments welfare gains up to 1.4% of base year GDP can occur by removing distortions in taxes. Welfare loss of up to 2.05% of it can happen if a less distortionary tax, such as the labour income tax is replaced by more distortionary taxes. These simulation results hold whether the capital markets are closed or open.     

Fundamentals, information, and international capital flows: A welfare analysis

In the recent discussion surrounding the design of a new international financial architecture, enhancing transparency has widely been proposed as a policy essential for increasing the efficiency of international capital markets. This paper uses a simple two-country (two-agent) general equilibrium model with incomplete markets and production to explore the welfare consequences of an increase in public information about country-specific fundamentals (increase in transparency). An improvement in the quality of information has two effects on the ex ante welfare of individual countries: A direct effect that increases the efficiency of global capital allocation and welfare, and an indirect general equilibrium effect that increases asset price volatility and may decrease welfare. When the degree of risk-aversion is low, at least one country will gain from an increase in information quality. If the degree of risk-aversion is high, then there are robust examples of economies for which an increase in information hurts all countries. The paper also discusses how certain institutional arrangements (international derivative markets, international agency) could ensure that all countries gain from better information by providing insurance against information-induced asset price risk.     

FINANCIAL CONDITIONS AND FISCAL PERFORMANCE IN EMERGING MARKETS

Various effects of rising integration of emerging markets into the global capital markets have been studied, yet not its potentially significant fiscal implications. This article argues that larger external financing implies a rising pass-through from external financial conditions to public finances. It contributes to the literature on financial globalization as well as to the one on measuring fiscal performance. It suggests a framework for analyzing the effects of external financial conditions on fiscal performance and applies it in two case studies to 40 emerging markets. The results suggest that ignoring financial conditions can entail misleading assessments of underlying fiscal performance. ( JEL F3, H5, H6)     

Secondary Capital Markets, Long-Run Growth, and the Term Structure of Asset Yields

An endogenous growth model is presented in which production uses a vector of capital inputs. Technologies for creating capital of different types vary by gestation period and productivity. Ownership of gestating capital must be "rolled over" in secondary capital markets in which transactions are costly. We study how reductions in transactions costs affect the equilibrium growth rate, the rate of return on saving, the volume of activity in secondary capital markets, and the term structure of asset yields. We give conditions under which reductions in transactions costs result in higher or lower growth rates.     

The Taxation of Financial Capital under Asymmetric Information and the Tax‐competition Paradox

Information sharing between governments is examined in an optimal‐taxation framework. We introduce a taxonomy of alternative systems of international capital‐income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion found in earlier literature that integration of international caopital markets may lead to the under‐provision of publicly provided goods. However, in contrast to previous results in the literature, under‐provision occurs due to inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public‐good provision as well as complete and voluntary information exchange between national tax authorities.     

Capital specificity,imperfect labor mobility and growth in developing economies

Labor markets in developing economies may be afflicted by a multiplicity of interacting distortions. We consider a general equilibrium model of an economy distorted by both sector-specific sticky wages and imperfect mobility of labor. In this framework, we contrast the implications of capital accumulation in the short and long run. We show that, in contrast to both the case in the absence of a sector-specific sticky wage and the case in the absence of imperfect labor mobility, the short and long-run effects of growth on the economic system converge as the degree of labor mobility is limited.     

INEQUALITY,INCOMPLETE CONTRACTS,AND THE SIZE DISTRIBUTION OF BUSINESS FIRMS*

This article analyzes the effects of intrafirm bargaining on the formation of firms in an economy with imperfect capital markets and contracting constraints. In equilibrium, wealth inequality induces a heterogeneous distribution of firm sizes, allowing for firms both too small and too large in terms of technical efficiency. The findings connect well to empirical facts such as the missing middle of firm‐size distributions in developing countries. The model can encompass a nonmonotonic relationship between aggregate output and inequality. It turns out that an inflow of capital may indeed decrease output in absolute terms.     

Rigid labour markets with trade and capital mobility: theory and evidence

Abstract We develop a multi‐country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra‐industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced‐form regressions as well as simulation results of a calibrated general equilibrium model.