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Capital market integration and fiscal sustainability

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  • Miyazawa, Kazutoshi
  • Ogawa, Hikaru
  • Tamai, Toshiki

Abstract

By constructing a two-country endogenous growth model with a debt-financing government, this paper studies the relationship between the sustainability of public finance and increases in inter-regional factor mobility. To this end, it identifies the minimum tax rate that ensures fiscal sustainability against the backdrop of capital tax competition and studies whether competition for mobile capital lowers or improves fiscal sustainability. The main findings are as follows: (i) when countries are symmetric, increasing capital flows promotes economic growth through the expansion of Romer-type knowledge spillovers, resulting in increased fiscal sustainability in all countries; and (ii) when a marked difference exists between countries, tax competition caused by capital movements might lower fiscal sustainability in a country with abundant capital and large outstanding debt.

Suggested Citation

  • Miyazawa, Kazutoshi & Ogawa, Hikaru & Tamai, Toshiki, 2019. "Capital market integration and fiscal sustainability," European Economic Review, Elsevier, vol. 120(C).
    • Handle: RePEc:eee:eecrev:v:120:y:2019:i:c:s0014292119301576
    DOI: 10.1016/j.euroecorev.2019.103305
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    Cited by:

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    3. R. M. Ammar Zahid & Can Simga‐Mugan, 2024. "The impact of International Financial Reporting Standards adoption on the integration of capital markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 229-250, January.
    4. Tamai, Toshiki, 2022. "Tax competition versus tax coordination in a multi-region endogenous growth model with an integrated capital market," Economic Modelling, Elsevier, vol. 114(C).
    5. Maebayashi, Noritaka, 2023. "The pace of fiscal consolidations, fiscal sustainability, and welfare: An overlapping generations approach," Journal of Macroeconomics, Elsevier, vol. 75(C).
    6. Cao, Hongjie & Li, Meina & Lu, Yuqi & Xu, Yang, 2022. "The impact of strengthening government auditing supervision on fiscal sustainability: Evidence from China's auditing vertical management reform," Finance Research Letters, Elsevier, vol. 47(PB).
    7. Maebayashi, Noritaka & Morimoto, Keiichi, 2022. "Global Corporate Income Tax Competition, Knowledge Spillover, and Growth," MPRA Paper 112790, University Library of Munich, Germany.
    8. Jiancai Pi & Kaiqi Zhang & Xiangyu Huang, 2023. "Financial globalization and wage inequality," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(2), pages 144-157, May.

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    More about this item

    Keywords

    Tax competition; Fiscal sustainability;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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