Re: regulating capital flows

[Peter Dorman <dormanp@xxxxxxxxxxxxxxxxxxx>]

I won't go into details right now, but I have become intrigued with the
use of regulations on capital flows to regulate indirectly current
account balances (rather than calibrating the regulations solely to
exchange rates).  Have others thought along these lines?

Peter Dorman

Paul Davidson wrote:
>
> Trond and David's concerns has to do with volatility in financial markets.
> Trond's bond would not necessarily solve the problem.  There have been
> periods when price fluctuations in bond markets clearly were much larger
> than in equity markets-- e.g., during the early Volker years.
>
> The question is how to stabilize the movement of financial assets whether
> they be stocks, bonds, foreign exchange, etc.  (What Trond and David forget
> is that in an open economy even if you restrict the domestic price of
> securities to plus or minus 20 %, the exchange rate permits wider
> fluctations in the value of these stocks in terms of another currency.)
>
> In April I gave an invited lecture to a plenary session of the Royal
> Economic Society annual conference entitled "Volatile Financial Markets and
> The Speculator" which I think provides some guidelines to understanding the
> problem.(And also the difference between arbitrage and speculation.)This
> lecture has been just published in the English journal ECONOMIC ISSUES, vol
> 3, September 1998. Peter Reynolds of Stratfordshire University UK is the
> Editor of this journal and I am sure he will be glad to tell you how to get
> your university library to order it. His email address is
> p.j.reynolds@xxxxxxxxxxxx
>
> In London last month I gave a paper at the Social Market Foundation as part
> of a debate on International financial market volatility. I gave a paper
> entitled "The Case For Regulating Internsational Capital Flows" (the only
> one on this side of the debate). Those on the other side were Nigel Lawson
> (Mrs. Thatcher's financial minister),  John Flemming of Oxford and Lord
> Megned Desai (who was a student of mine in macroeconomics when he got his
> Ph. D from the Univ. of Pennsylvania).  The Social Market Foundation will
> be publishing this debate in January 1999.
>
> The crux of my argument in the debate paper is that the interpretation of
> the role that financial markets play in the economy depends on the theory
> one, implicitly or explicitly, relies on.
>
> There are two alternative theories (1) the classical efficient market
> theory and (2) Keynes's liquidity theory of financial markets.  The first
> theory logically leads to a laissez-faire policy for otherwise policy
> prevents efficiency (with asymetric information the only policy is
> transparency so information becomes close to costless to obtain). Keynes's
> theory, on the other hand, logically leads to the argument that
> transparency wouldn't do it and that there is a role for government in
> developing an institution to stabilize the financial market prices.
>
> I then go through the various policy suggestions on the public discssion
> table, to indicate how these meet the theories criteria.  [I also rely on,
> and use, some recent writings of Peter L. Bernstein author of the best
> selling book AGAINST THE GODS, a treatise on risk, probability theory, and
> financial management.  Peter argues (correctly in my view) that a liquid
> market cannot be an efficient market.  Efficiency requires the absence of
> liquidity.]
>
> David's plus or minus 20% policy is a take off on John Williamson's target
> zone exchange rate (or FEER) policy . For thosde interested in the debate
> of whether a FEER folicyy works oor not see the Wintyer 1992-3 issue of the
> JPKE (vol. 15) for a debate between John and myself on Reforming The Worlds
> Money.  In my view, to paraphrase Franklin Roosevelt, the only thing we
> have to FEAR is FEER itself!
>
> Paul
> Paul Davidson
> Holly Chair of Excellence in Political Economy
> Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
> Economics Department -- 523 SMC
> University of Tennessee
> Knoxville, Tennessee 37996-0550
> email: Pdavidson@xxxxxxx;   phone: (423)974-4221;    fax: (423) 974-1686
> http://econ.bus.utk.edu/Davidson.html