International capital markets: Controls, taxes, and resource allocation

This thesis draws on recent work in economics and finance to discuss impediments to trade and taxation in international capital markets.;Chapter Two develops a simple real stochastic two-period equilibrium model of a small open economy to show how optimizing agents respond to changes in capital controls that alter the riskiness of their savings portfolio. The presence of controls always give incentives to self-insure ex post via adjustment in labor supply. It may also give incentives to self-insure ex ante via adjustment in savings if the elasticity of intertemporal substitution is sufficiently low. The elasticity of intertemporal substitution and the degree of risk aversion are separately parameterized by adopting Kreps-Porteus preferences. Finally, the inefficiencies caused by capital controls and the effect of self-insurance on the variance-covariance pattern of real variables are also examined.;Chapter Three, jointly written with Peter Sellin (IIES), considers the effects on the (instantaneously) riskless interest rate, investors' portfolio choice, and the equilibrium capital allocation from removing two specific quantitative barriers to international capital movements. The barriers considered are a limitation expressed as a maximum percentage of the domestic capital stock that foreign investors can hold, and a quantitative absolute lid on the amount of capital exports allowed from the domestic economy respectively. When a subset of investors are constrained due to quantitative restrictions on capital flows, all agents will respond by changing their behavior. Adjustment to changes in regulation will involve both asset substitution and altered hedging behavior against changes in the world market interest rate.;Chapter Four shows that the result that proportional capital income taxation on all assets encourages risk taking collapses in a general equilibrium setting. Residence based taxation cause only savings distortions, while asymmetric taxation across risky assets and non-uniform corporate taxation across economies distort both savings and investment decisions. Substitutability between investment technologies in a diversification sense determines the extent of the investment distortion while the intertemporal elasticity of substitution and the implicit value of the claim to non-traded transfers determine the direction of the savings distortion. Non-traded transfers imply a new form of precautionary savings.