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Increased Capital Mobility - A Challenge for National Macroeconomic Policies

  • Paul De Grauwe


    (K.U.Leuven, C.E.S., International Economics)

  • Magdalena Polan


    (K.U.Leuven, C.E.S., International Economics)

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    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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    Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number wpie012.

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    Length: 20 pages
    Date of creation: Jun 2000
    Date of revision:
    Handle: RePEc:kul:kulwps:wpie012
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    1. Asdrubali, Pierfederico & Sorensen, Bent E & Yosha, Oved, 1996. "Channels of Interstate Risk Sharing: United States 1963-1990," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1081-1110, November.
    2. Matthew T. Jones and Maurice Obstfeld., 1997. "Saving, Investment, and Gold: A Reassessment of Historical Current Account Data," Center for International and Development Economics Research (CIDER) Working Papers C97-094, University of California at Berkeley.
    3. Alan M. Taylor, 1994. "Domestic Saving and International Capital Flows Reconsidered," NBER Working Papers 4892, National Bureau of Economic Research, Inc.
    4. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 173-241, January.
    5. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc.
    6. Michael D. Bordo & Barry Eichengreen & Douglas A. Irwin, 1999. "Is Globalization Today Really Different than Globalization a Hunderd Years Ago?," NBER Working Papers 7195, National Bureau of Economic Research, Inc.
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