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Offshore financial centers: parasites or symbionts?

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Author Info
Andrew K. Rose
Mark M. Spiegel

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Abstract

This paper analyzes the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, since they act as a competitive fringe 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 between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2005-05.

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Date of creation: 2005
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Handle: RePEc:fip:fedfwp:2005-05

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Keywords: Banks and banking; International ; Competition ; Bank supervision;

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  1. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank. [Downloadable!]
  2. Gian Maria Milesi-Ferretti & Philip R. Lane, 2004. "International Investment Patterns," IMF Working Papers 04/134, International Monetary Fund. [Downloadable!]
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  3. 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. [Downloadable!] (restricted)
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  4. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August. [Downloadable!] (restricted)
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  5. Huizinga, Harry & Nielsen, Soren Bo, 2003. "Withholding taxes or information exchange: the taxation of international interest flows," Journal of Public Economics, Elsevier, vol. 87(1), pages 39-72, January. [Downloadable!] (restricted)
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  6. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. George M. von Furstenberg, 2007. "Aspects, Models and Measures for Assessing the Competitiveness of International Financial Services in a Particular Location," Working Papers 182007, Hong Kong Institute for Monetary Research. [Downloadable!]
  2. Donato Masciandaro, 2008. "Offshore financial centres: the political economy of regulation," European Journal of Law and Economics, Springer, vol. 26(3), pages 307-340, December. [Downloadable!] (restricted)
  3. Mark M. Spiegel, 2008. "Financial globalization and monetary policy discipline," Working Paper Series 2008-10, Federal Reserve Bank of San Francisco. [Downloadable!]
  4. Rose, Andrew K & Spiegel, Mark, 2007. "International Financial Remoteness and Macroeconomic Volatility," CEPR Discussion Papers 6301, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Andrew K. Rose & Mark M. Spiegel, 2008. "Non-Economic Engagement and International Exchange: The Case of Environmental Treaties," NBER Working Papers 13988, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. George von Furstenberg, 2007. "Assessing the Competitiveness of International Financial Services in Particular Locations: A Survey of Methods and Perspectives," Caepr Working Papers 2007-024, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington. [Downloadable!]
  7. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Picard Pierre M. & Pieretti Patrice, 2008. "Bank Secrecy, Illicit Money and Offshore Financial Centers," CREA Discussion Paper Series 08-18, Center for Research in Economic Analysis, University of Luxembourg. [Downloadable!]
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