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Taxing short-term capital flows - An option for transition economies?

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  • Buch, Claudia M.
  • Heinrich, Ralph P.
  • Pierdzioch, Christian

Abstract

This paper discusses whether the implementation of a tax on short-term capital flows can make the transition economies of Central and Eastern Europe less vulnerable to adverse external shocks and to sudden withdrawals of foreign capital. The following section outlines the main arguments which are advanced by the supporters and opponents of a transactions tax on foreign capital flows. We also develop a simple theoretical framework which allows us to study the effects of a tax on capital inflows. The model reveals that it is important to distinguish between two effects of a transactions tax. On the one hand, a transactions tax might be a useful tool to discourage destabilizing trading strategies on the foreign exchange market. On the other hand, it should be taken into account that a tax on foreign capital flows pushes the economy to a new steady state. This induces an overshooting of the exchange rate if super efficient financial markets react faster than goods markets. Thus, the implementation of a transactions tax by itself can be viewed as a source of additional (excess) volatility of the exchange rate. Section 3 briefly discusses the experience of Chile which maintains a deposit requirement for short-term capital inflows. Section 4 gives an account of the structure of capital flows of the transition economies and of the restrictions which currently pertain to the capital account of the balance of payments. We restrict our analysis to four of the more advanced reform countries – i.e., the Czech Republic, Estonia, Hungary, and Poland – because the policy issues of high capital inflows are most relevant for these countries. Section 5 concludes.

Suggested Citation

  • Buch, Claudia M. & Heinrich, Ralph P. & Pierdzioch, Christian, 1998. "Taxing short-term capital flows - An option for transition economies?," Kiel Discussion Papers 321, Kiel Institute for the World Economy (IfW).
  • Handle: RePEc:zbw:ifwkdp:321
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    12. Buch, Claudia M. & Heinrich, Ralph P. & Piazolo, Daniel, 1998. "Southern enlargement of the European Union and capital account liberalization: Lessons for Central and Eastern Europe," Kiel Working Papers 871, Kiel Institute for the World Economy (IfW).
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    Cited by:

    1. Buch, Claudia M., 1999. "Chilean-type capital controls: A building block of the new international financial architecture?," Kiel Discussion Papers 350, Kiel Institute for the World Economy (IfW).
    2. Nunnenkamp, Peter, 2000. "Boom, bust, recovery – What next in private capital flows to emerging markets?," Kiel Discussion Papers 362, Kiel Institute for the World Economy (IfW).
    3. Florian Neagu, 2003. "Net Foreign Assets Management and Capital Account Liberalization. The Romanian Case," International Finance 0310002, University Library of Munich, Germany.
    4. Nunnenkamp, Peter, 1998. "Wirtschaftliche Aufholprozesse und Globalisierungskrisen in Entwicklungsländern: Implikationen für die nationale Wirtschaftspolitik und den globalen Ordnungsrahmen," Kiel Discussion Papers 328, Kiel Institute for the World Economy (IfW).
    5. M. Frenkel & G. Shimidt & G. Stadtmann & Nickle Christiane, 2002. "The Effects of Capital Controls on Exchange Rate Volatility and Output," International Economic Journal, Taylor & Francis Journals, vol. 16(4), pages 27-51.
    6. Sell, Friedrich L., 2004. "Währungspolitik im Dienste von Entwicklung : Immer noch ein Forschungsprogramm!," Working Papers in Economics 2004,2, Bundeswehr University Munich, Economic Research Group.
    7. Gustavo Abarca & Claudia Ramírez & José Gonzalo Rangel, 2012. "Capital Controls and Exchange Rate Expectations in Emerging Markets," Working Papers 2012-08, Banco de México.
    8. Buch, Claudia M. & Heinrich, Ralph P. & Pierdzioch, Christian, 2001. "Globalisierung der Finanzmärkte: Freier Kapitalverkehr oder Tobin-Steuer?," Kiel Discussion Papers 381, Kiel Institute for the World Economy (IfW).

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