Paul De Grauwe () (K.U.Leuven, C.E.S., International Economics) Magdalena Polan () (K.U.Leuven, C.E.S., International Economics)
Abstract
The increased mobility of capital of the last few decades creates new challenges for the macroeconomic policies of the nation-states. In this paper we analyse some of these challenges. Contrary to what is often alleged, increased capital mobility does not necessarily increase the need for co-ordination of monetary and fiscal policies. The reason is that this increased mobility of capital has led many nations to move towards greater exchange rate flexibility. And the latter reduces the need to co-operate in the monetary field. The effect on the need for fiscal policy co-ordination crucially depends on how spillovers of fiscal policies from one country to the other are changed. To the extent that capital market integration and trade integration go together we do not know how the net spillovers of fiscal policies are affected. Increased capital mobility creates many other challenges. We analyse several of these. We argue that while increased capital mobility puts more pressure on countries to move away form pegged exchange rates towards either more flexibility or more rigidity of the exchange rates, it also increases the temptation to escape this hard choice by reimposing capital controls. We argue, however, that one particular form of capital controls, i.e. the Tobin tax, is unlikely to succeed in giving countries a “Third Way” option.
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Publisher Info
Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number
wpie012.
Find related papers by JEL classification: F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission