Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview
response will also occur with a lag. Thus, the outlook is for an increased variability of interest rates. 13There is one additional variable to consider in the outlook for monetary policy. If our analysis is correct, the terms of trade effect will produce downward pressure on the U.S. dollar during 1989, just as it did during 1985-87. The decline in the dollar in 1989 need not be inflationary. Insofar as the Fed gets worried about the decline in the dollar, the response will be to slow the rate of growth of the monetary base in order to stabilize the dollar's value. This could be extremely bullish for bonds, and 1989 could well be a good year for the bond market.
SUMMARY IMPLICATIONS: IMPACT OF TAX RATE CHANGES ON THE INTERNATIONAL SECTOR
Tax rate cuts result in higher after-tax rates of return for domestically located assets. The higher after-tax return will result in a net capital inflow. Ultimately the capital inflow will reduce the after-tax return to its long-run equilibrium. Under a floating exchange rate system, the balance of payments must always be zero. Hence, the capital inflow will mirror the trade balance. Therefore, our framework predicts that:
A tax rate reduction will lead to the gradual appreciation of domestic currency. However, the surge in the foreign exchange value of the currency will ultimately be reversed.
The tax rate reduction and capital inflow will generate a corresponding deterioration of the trade balance.
Initially, the domestic stock market will surge relative to the rest of the world.
A sectorial effect will also become evident. During the appreciation phase, the nontraded sector industries will outperform the traded sector industries while during the depreciation phase, the relative performance will be reversed.

The U.S. experience during the 1980s is entirely consistent with our framework. Since they are lowering their personal income tax rate from 60 percent to 40 percent, our analysis suggests that during the next several years, the British economy will experience many of the symptoms experienced by the United States during the 1980s.


NOTES
1.
For an analysis of the policies of this period see: Arthur B. Laffer, "Balance of Payments and Exchange Rate Systems," Financial Analysts Journal, August 1974; "Monetary Policy and the Balance of Payments," Journal of Money, Credit and Banking, February 1972; "The United States Balance of Payments--A Financial Center View," Journal of Law and Contemporary Problems, August 1969; "The Economic Consequences of Devaluation of Reserve Currency Country," World Monetary Disorder, ed. Patrick Boarman and David Tuerck ( New York: Praeger, 1976); "Two Arguments forFixed Rates,"

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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