nep-ifn New Economics Papers
on International Finance
Issue of 2012‒05‒22
four papers chosen by
Vimal Balasubramaniam
National Institute of Public Finance and Policy

  1. Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls By Kristin Forbes; Marcel Fratzscher; Thomas Kostka; Roland Straub
  2. Bond and Equity Home Bias and Foreign Bias: an International Study By VanPée, Rosanne; De Moor, Lieven
  3. Financial Liberalization and Institutional Development By Markus Alzer; Ramin Dadasov
  4. De Facto Capital Mobility, Equality, and Tax Policy in Open Economies By Troeger, Vera

  1. By: Kristin Forbes; Marcel Fratzscher; Thomas Kostka; Roland Straub
    Abstract: We use changes in Brazil’s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil’s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling —i.e. changes in investor expectations about future policies— rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries.
    JEL: F3 F4 F5 G01 G11
    Date: 2012–05
  2. By: VanPée, Rosanne (Hogeschool-Universiteit Brussel (HUB), KULeuven); De Moor, Lieven (Hogeschool-Universiteit Brussel (HUB), KULeuven)
    Abstract: In this paper we explore tentatively and formally the differences between bond and equity home bias and foreign bias based on one large scale dataset including developed and emerging markets for the period 2001 to 2010. We set the stage by tentatively and formally linking the diversion of bond and equity home bias in OECD countries to the increasing public debt issues under the form of government bonds i.e. the supply-driven argument. Unlike Fidora et al. (2007) we do not find that exchange rate volatility has a greater impact on bond home bias than on equity home bias. We find, instead, that exchange rate volatility has a greater impact on bond foreign bias than on equity foreign bias. We also show that the level of financial development is more important for attracting foreign bond investors than foreign equity investors; and country and corporate governance practices matter more for international equity portfolios than for international bond portfolios. Besides variables being significantly more, less or incompatibly important for bond versus equity home and foreign bias, we also find variables exclusively significant for bonds. Above all this paper points out the distinct nature of bond home and foreign bias versus equities and, therefore, stimulates further research on bond home and foreign bias despite the large amount of existing literature on equity home bias.
    Date: 2012–05
  3. By: Markus Alzer; Ramin Dadasov
    Abstract: This paper empirically analyzes the effects of de jure financial openness on institutional quality as captured by indicators on investment risk, corruption level, impartiality of judiciary system as well as the effectiveness of bureaucratic authorities. Using a panel data set of more than 110 countries and a time span from 1984 to 2005, we show that a higher degree of financial openness improves institutional quality in particular by reducing investment risks. We also study the effect of a single liberalization reform on the development of institutional quality. Again, we find evidence for the beneficial impact of financial liberalization with the exception of the level of corruption. We additionally show that if financial liberalization is supported by simultaneous political liberalization, the benign consequences of financial opening for the institutional performance are even larger, while financial deregulation in former socialist countries tends to worsen institutional quality.
    Keywords: financial integration, liberalization reform, institutional development, institutional dimensions
    JEL: F02 D72 P48
    Date: 2012–05
  4. By: Troeger, Vera (University of Warwick)
    Abstract: This paper attempts at giving theoretical and empirical answers to the remaining puzzles in the literature on tax competition: the persistently high tax rates on mobile capital and the large variation in domestic tax systems. I argue that governments face a political trilemma, in which they cannot maintain the politically optimal level of public good provision, reduce capital taxes to competitive levels and implement a political support-maximizing mix of tax rates on capital and labour simultaneously. In particular, while legal restriction on capital flows have been eliminated by virtually all OECD countries, de facto capital mobility falls short of being perfect. Limits to full capital mobility result from ownership structures: the higher the concentration of capital, the higher the de facto mobility of capital and the lower the equilibrium tax rate. Second, the demand for the provision of public goods further constraints governments’ choices of the capital tax rate. If revenue from taxation of mobile factors declines, politicians cannot necessarily cut back spending without losing political support. Policy makers, accordingly, do not face a simple optimization problem when deciding on capital taxation. Rather, they have to choose a tax system which allows them to supply an appropriate level of public goods. Policy makers finally face a trade-off resulting from the redistributive conflict between capital-owners and workers. This conflict does not resemble a mere zero-sum game, because lower levels of capital taxation are likely to improve aggregate welfare, but the decision on capital taxation also cannot be analyzed in isolation from the distributive effects of reducing taxes on mobile factors. This political logic of tax competition generates important predictions which are tested empirically for 23 OECD countries over 30 years within a spatial econometrics framework
    Date: 2012

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