Capital Control Taxes in an Emerging Market Economy

Abstract

Historically, Emerging Markets (EMs) that own foreign debt and exhibit a high degree of dollarization have demonstrated vulnerability to a range of both real and financial shocks. Governments often use a range of capital control measures, particularly in nations burdened with external debt, with the aim of mitigating sudden swings in both inflows and outflows of capital. These policies are implemented to lessen exchange rate volatility and prevent dollarization. This study employs second moments analysis, impulse response functions and the welfare analysis to investigate the impact of a tax policy that restricts international capital flows on several macroeconomic variables in an emerging economy. A dynamic stochastic general equilibrium (DSGE) model is employed to examine the impact of the tax imposed on foreign borrowing on the economy, including both real shocks such as technology and growth, as well as financial shocks such as country risk premium. The findings of the study indicate that capital control taxes have a diminishing effect on the variability of significant macroeconomic variables, such as investment and consumption, when imposed at lower levels. Conversely, these taxes exhibit a stabilizing impact on the volatility of the trade balance-to-output ratio when implemented at higher levels. Moreover, quantitative evidence reveals that country risk premium shocks exert a substantial influence on variations in both the trade balance-to-output ratio and the level of investment, accounting for around 25% and 50% of the fluctuations, respectively. Finally, the existence of such a taxation enhances the intertemporal utility function at the steady state and reduces its volatility in the case of technology and growth shocks.

Keywords

• Business Cycles
• Emerging Economy
• Dynamic Stochastic Optimization
• Capital Control Tax
• Welfare Analysis

Bir Yükselen Piyasa Ekonomisinde Sermaye Kontrolü Vergileri

Abstract

Tarihsel olarak, dış borcu olan ve yüksek derecede dolarizasyon sergileyen Yükselen Piyasalar (EMs), hem reel hem de finansal şoklara karşı kırılganlık göstermişlerdir. Hükümetler, özellikle dış borç yükü altında olan ülkelerde, sermayenin hem giriş hem de çıkışlarındaki ani dalgalanmaları azaltmak amacıyla sıklıkla bir dizi sermaye kontrol önlemi kullanmaktadırlar. Bu politikalar döviz kuru oynaklığını azaltmak ve dolarizasyonu önlemek amacıyla uygulanmaktadır. Bu çalışma, yükselen bir ekonomide uluslararası sermaye akışlarını kısıtlayan bir vergi politikasının çeşitli makroekonomik değişkenler üzerindeki etkisini araştırmak için ikinci-momentler analizini, etki tepki fonksiyonlarını ve refah analizini kullanmaktadır. Dış borçlanmaya uygulanan verginin ekonomi üzerindeki etkisini incelemek için hem teknoloji ve büyüme gibi reel şokları hem de ülke risk primi gibi finansal şokları içeren dinamik bir stokastik genel denge (DSGE) modeli kullanılmıştır. Çalışmanın bulguları, sermaye kontrol vergilerinin daha düşük seviyelerde uygulandığında yatırım ve tüketim gibi önemli makroekonomik değişkenlerin oynaklığı üzerinde azaltıcı bir etkiye sahip olduğunu göstermektedir. Tersine, bu vergiler daha yüksek seviyelerde uygulandığında ticaret dengesinin üretime oranının oynaklığı üzerinde dengeleyici bir etki göstermektedir. Dahası, niceliksel kanıtlar, ülke risk primi şoklarının hem ticaret dengesi/çıktı oranındaki hem de yatırım seviyesindeki değişimler üzerinde önemli bir etkiye sahip olduğunu ve dalgalanmaların sırasıyla yaklaşık %25 ve %50'sini oluşturduğunu ortaya koymaktadır. Son olarak, böyle bir vergilendirmenin varlığı, zamanlar arası fayda fonksiyonunun durağan durum seviyesini arttırmakta ve zamanlar arası fayda fonksiyonunun oynaklığını teknoloji ve büyüme şokları durumunda azaltmaktadır.

Keywords

• İş Çevrimleri
• Yükselen Ekonomi
• Dinamik Stokastik Optimizasyon
• Sermaye Kontrolü Vergisi
• Refah Analizi

References

1. Adam, K., Beutel, J., Marcet, A. & Merkel, S. (2015). Can a Financial Transaction Tax Prevent Stock Price Booms?. Journal of Monetary Economics, 76, S90-S109.
2. Agapova, A. & Volkov, N. (2021). Asymmetric Tax-Induced Trading: The Effect of Capital Gains Tax Changes. The Quarterly Review of Economics and Finance, 79, 245-259.
3. Agénor, P. R., McDermott, C. J. & Prasad, E. S. (2000). Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts. The World Bank Economic Review, 14(2), 251-285.
4. Aguiar, M. & Gopinath, G. (2007). Emerging Market Business Cycles: The Cycle is the Trend. Journal of Political Economy, 115(1), 69-102.
5. André, M. C., Armijo, A., Espidio, S. M. & Sandoval, J. (2023). Policy Mix in a Small Open Emerging Economy with Commodity Prices. Latin American Journal of Central Banking, 4(1), 100082.
6. Becchetti, L., Ferrari, M. & Trenta, U. (2014). The Impact of the French Tobin Tax. Journal of Financial Stability, 15, 127-148.
7. Berentsen, A., Huber, S. & Marchesiani, A. (2016). The Societal Benefit of a Financial Transaction Tax. European Economic Review, 89, 303-323.
8. Brunnermeier, M., Crockett, A., Goodhart, C. A., Persaud, A. & Shin, H. S. (2009). The Fundamental Principles of Financial Regulation (Vol. 11). Geneva: ICMB, International Center for Monetary and Banking Studies.

9. Buss, A., Dumas, B., Uppal, R. & Vilkov, G. (2016). The Intended and Unintended Consequences of Financial-Market Regulations: A General-Equilibrium Analysis. Journal of Monetary Economics, 81, 25-43.
10. Capelle-Blancard, G. & Havrylchyk, O. (2016). The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility. International Review of Financial Analysis, 47, 166-178.
11. Claessens, S., Keen, M. & Pazarbasioglu, C. (2010). Financial Sector Taxation: The IMF’s Report to the G-20 and Background Material. Washington: International Monetary Fund.
12. Correia, I., Neves, J. C. & Rebelo, S. (1995). Business Cycles in a Small Open Economy. European Economic Review, 39(6), 1089-1113.
13. Damette, O., Sobczak, K. & Betti, T. (2022). Financial Transaction Tax, Macroeconomic Effects and Tax Competition Issues: A Two-Country Financial DSGE Model (No. wp2022-1). Bank of Estonia.
14. De Mooij, R. A. & Keen, M. (2016). Debt, Taxes, and Banks. Journal of Money, Credit and Banking, 48(1), 5-33.
15. Deng, Y., Liu, X. & Wei, S. J. (2018). One Fundamental and Two Taxes: When Does a Tobin Tax Reduce Financial Price Volatility?. Journal of Financial Economics, 130(3), 663-692.
16. Garcia-Cicco, J., Pancrazi, R. & Uribe, M. (2010). Real Business Cycles in Emerging Countries?. American Economic Review, 100(5), 2510-2531.
17. Greenwood, J., Hercowitz, Z. & Huffman, G. W. (1988). Investment, Capacity Utilization, and the Real Business Cycle. The American Economic Review, 402-417.
18. Hvozdyk, L. & Rustanov, S. (2016). The Effect of Financial Transaction Tax on Market Liquidity and Volatility: An Italian Perspective. International Review of Financial Analysis, 45, 62-78.
19. Jeanne, O. & Korinek, A. (2010). Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach. American Economic Review, 100(2), 403-407.
20. Jin, H. & Xiong, C. (2023). Financial Openness, Bank Capital Flows, and the Effectiveness of Macroprudential Policies. Macroeconomic Dynamics, 27(1), 171-202.
21. Kitano, S. & Takaku, K. (2017). Capital Controls and Financial Frictions in a Small Open Economy. Open Economies Review, 28, 761-793.
22. Korinek, A. (2018). Regulating Capital Flows to Emerging Markets: An Externality View. Journal of International Economics, 111, 61-80.
23. McCulloch, N. & Pacillo, G. (2011). The Tobin Tax: A Review of the Evidence. IDS Research Reports, 2011(68), 1-77.
24. Mendoza, E. G. (1991). Real Business Cycles in a Small Open Economy. The American Economic Review, 797-818.
25. Mendoza, E. G. (1995). The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations. International Economic Review, 101-137.
26. Neumeyer, P. A. & Perri, F. (2005). Business Cycles in Emerging Economies: The Role of Interest Rates. Journal of Monetary Economics, 52(2), 345-380.
27. Ostry, M. J. D., Ghosh, M. A. R., Habermeier, M. K. F., Laeven, M. L., Chamon, M. M., Qureshi, M. & Kokenyne, A. (2011). Managing Capital Inflows: What Tools to Use?. International Monetary Fund.
28. Raffer, K. (1998). The Tobin Tax: Reviving a Discussion. World Development, 26(3), 529-538.
29. Schmitt-Grohé, S. & Uribe, M. (2003). Closing Small Open Economy Models. Journal of international Economics, 61(1), 163-185.
30. Schmitt-Grohé, S. & Uribe, M. (2004). Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function. Journal of Economic Dynamics and Control, 28(4), 755-775.
31. Shin, J. K. & Subramanian, C. (2016). Monetary Policy and Noise Traders: A Welfare Analysis. Journal of Macroeconomics, 49, 33-45.
32. Tobin, J. (1978). A Proposal for International Monetary Reform. Eastern Economic Journal, 4(3/4), 153-159.
33. Umlauf, S. R. (1993). Transaction Taxes and the Behavior of the Swedish Stock Market. Journal of Financial Economics, 33(2), 227-240.
34. Uribe, M. & Schmitt-Grohé, S. (2017). Open Economy Macroeconomics. Princeton University Press.
35. Uribe, M. & Yue, V. Z. (2006). Country Spreads and Emerging Countries: Who Drives Whom?. Journal of International Economics, 69(1), 6-36.
36. Yin, Z., Peng, H., Xiao, W. & Xiao, Z. (2022). Capital Control and Monetary Policy Coordination: Tobin Tax Revisited. Research in International Business and Finance, 59, 101514.