Arvind Subramanian--Coordinated Capital Controls: A Further Argument In Favor
http://www.piie.com/realtime/?p=1077
Paul Krugman, in a column last month for the New York Times, endorsed a tax on financial transactions, proposed recently by Adair Turner, Britainâs top financial regulator. It is important to distinguish this Turner proposal from the original Tobin tax on international flows and these two taxes in turn from the kind of coordinated capital controls I proposed in this article last month and in this blog post two weeks ago.
Tobinâs original idea was to discourage speculation by taxing flows of international capital. The Turner variant is to tax all financial transactions: domestic and international. What they have in common is that both are seen as structural measures to be applied regardless of the state of the macroeconomic cycle.
In contrast, the capital controls that are now being proposed are more in the spirit of âmacroprudentialâ measures to be taken in response to surges in international capital flows (and not to steady and permanent flows) to emerging markets that have the potential of creating bubbles in asset prices, including exchange rates. Such measures are therefore intended to be taken during the upswing of the cycle and not at all times.
The case for a number of emerging-market countries coordinating such measures under the auspices of the G-20 is to avoid the stigma of being labeled market unfriendly, a stigma that is a consequence of the strongâbut misguidedâbelief system that all foreign capital in all quantities is always good. This is important because the magnitude of the tax that emerging-market countries may need to impose could be substantial in magnitude and not-so-short term in duration.
Read it all.
