Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

will increase productive activity in the United States relative to the rest of the world. Domestic asset values will increase relative to asset values in the rest of the world, and the United States will experience an inflow of capital. Given a floating exchange rate system, the balance of payments is always zero, and the trade balance mirrors the capital account. Thus, the deterioration in the trade balance will mean an improvement in the capital account.

The approach predicts that an appreciation of the real exchange rate will result in an increase in domestic production, higher domestic asset values, and a decrease in both imports and exports as fractions of GNP. However, since there is a net capital inflow, the trade balance must deteriorate. Hence, the increase in exports will be less than the increase in imports. The U.S. experience of the 1980s is entirely within this view. 9


NOTES

The valuable comments and suggestions of Rudolph Hauser and Michael Banton are greatly appreciated.

1.
The real exchange or terms of trade rate measures the value of goods produced in one country (e.g., the United States) in terms of goods produced in another country (e.g., Germany). The real exchange rate is calculated by first converting the foreign CPI into dollars by dividing it by the exchange rate (foreign currency units per dollar). Then the dollar-denominated foreign CPI is divided by the U.S. CPI to obtain the real exchange rate.
2.
See Chapter 16.
3.
The relative stock return is calculated as follows: The domestic percent change in the stock price index is converted into dollars; these calculations are reported in Table 22.2. From the dollar-denominated foreign stock markets, the U.S. stock price performance is subtracted. This gives rise to the foreign stock market nominal excess return. Subtracting the U.S. inflation rate yields the real rate of return between each of the foreign countries and the United States.
4.
There is an extensive academic literature on the conditions under which factor prices may equalize factor returns. See, for example, Paul A. Samuelson, "International Trade and the Equalization of Factor Prices," Economic Journal 58 ( June 1948), pp. 163-84. For the effect of factor mobility in the equalization of factor prices, see Robert A. Mundell , "International Trade and Factor Mobility," American Economic Review 47, no. 3 ( June 1957), pp. 321-35.
5.
See R. A. Mundell, "International Trade and Factor Mobility."
6.
See, for example, Moshe Hagigi, "Industry Versus Country Risk in International Investments of U.S. Pension Funds," Financial Analysts Journal, September/October 1988, pp. 70-74.
7.
Arthur B. Laffer, "Minding our Ps and Qs: Exchange Rates and Foreign Trade," A. B. Laffer Associates, April 14, 1986.
8.
Victor A. Canto and Arthur B. Laffer, "Great Britain Moves to the Supply-Side," A. B. Laffer Associates, November 2, 1988. See also Chapter 16.

-320-

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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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