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Offshore Financial Centres: Parasites or Symbionts?

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  • AndrewK. Rose
  • MarkM. Spiegel

Abstract

This article analyses the causes and consequences of offshore financial centres (OFCs). While OFCs are likely to encourage bad behaviour in source countries, they may also have unintended positive consequences, such as providing competition for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance to the OFC. Our model predicts that proximity to an OFC is likely to be pro-competitive. We test and confirm the predictions empirically. OFC proximity is associated with a more competitive domestic banking system and greater overall financial depth. Copyright 2007 The Author(s). Journal compilation Royal Economic Society 2007.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 117 (2007)
Issue (Month): 523 (October)
Pages: 1310-1335

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Handle: RePEc:ecj:econjl:v:117:y:2007:i:523:p:1310-1335

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  1. Harry Huizinga & Søren Bo Nielsen, . "Withholding Taxes or Information Exchange: The Taxation of International Interest Flows," EPRU Working Paper Series 00-19, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  2. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
  3. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank.
  4. Philip R. Lane & Gian-Maria Milesi-Ferretti, 2004. "International Investment Patterns," IMF Working Papers 04/134, International Monetary Fund.
  5. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  6. James R. Hines, Jr. & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
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