POLICIES: A FAVOURABLE VIEW
GLOBALIZATION OF CAPITAL: A FEW STATISTICS
TRADITIONAL POWERS OF GOVERNMENT: A VANISHING SPECIES
POSITIVE IMPACT OF THE GLOBALIZATION OF FINANCIAL MARKETS
ON MONETARY POLICY
POSITIVE IMPACT OF THE GLOBALIZATION OF FINANCIAL MARKETS
ON TAX POLICY
FINANCIAL MARKETS AND GOVERNMENT
A FAVOURABLE VIEW
after the end of Soviet hegemony over the countries of the East Bloc,
the following graffiti were seen in Poland: "We wanted freedom. Instead,
we got the obligatory market." Some critics around the world feel
that the forces of capital and the financial markets have become too powerful.
They think that governments no longer exercise any control over tax and
monetary policies because the policies in question are now dictated by
the forces of the financial market. These critics denounce what they see
as the "privatization" of monetary and tax policies which are
now, they claim, determined by brokers, exchange dealers and major portfolio
opposed to the forces of the financial market say that, instead of striving
to meet the real needs of the public (by creating jobs or maintaining
the social safety net, for example), governments are obsessed by the strict
demands of the financial markets. The opponents of the market forces feel
that governments should be free to govern. They accordingly argue that
if governments ended speculative trading and imposed better controls on
movements of capital, they would regain their full sovereign powers, since
they could then use all the means normally available to a sovereign state
to manage its economy.
is true that major economic upheavals have occurred in the financial markets.
First, governments throughout the world have such high levels of debt
that they siphon off a large part of the capital available in the world;
the growing deficits in the current account balances of a number of countries,
including the industrialized counties, provide a clear illustration of
this phenomenon. Second, business is becoming more global. To meet their
needs for capital, companies can access the same large pools of capital
as governments. Third, the loosening of restrictions on financial institutions
and the recent proliferation in certain financial instruments (derivatives,
for example) mean that capital has never had such freedom to move around
the globe. Finally, the market for information has become a single large
and powerful global market.
globalization of the financial markets and the speed with which information
moves mean that the slightest economic and political shock can have a
major impact on the economic welfare of a large part of the world. In
global terms, investors are informed almost instantaneously of any change
that may affect the return on their investments. The volume of transactions
concluded daily around the world is such that an incorrect risk assessment
may lead to losses of several hundred million dollars in only a few seconds.
It should not come as a surprise therefore that under these conditions
investors and exchange dealers are highly averse to risks or any uncertainty.
is also true that the forces of the financial markets are highly intolerant.
They either like you or they don't. If they approve, they will reward
the governments that they feel are making the right decisions. However,
if they find the policies of a government unacceptable, they will punish
it severely and quickly by giving its bonds, currency and interest rates
a rough ride. There can be no doubt that it is better to have these market
forces with you than against you.
can, however, be argued that the globalization of this market has major
benefits for government. Financial forces can act as alarm systems and
force governments to make the necessary decisions; they can be reliable
allies in the search for sound government finances and price stability.
Without them, many governments, motivated solely by prospects of electoral
advantage, might be tempted to apply policies that could have disastrous
consequences. This paper presents the argument in favour of globalization
of financial markets.
GLOBALIZATION OF CAPITAL: A FEW STATISTICS
are several ways to measure the extent of capital integration. One is
to measure the gap between real interest rates in various places around
the globe. It would be normal for an integrated financial market to dictate
a world price for this capital. Given the many risk factors that can influence
the cost of capital (a government defaults on its payments, political
stability, public debt, risk of currency devaluation, inflation forecasts),
real interest rates for a given term should be similar. In a recent article,
Norman Fieleke of the Federal Reserve Bank of Boston noted that the three-month
securities of several countries bore almost identical real interests rates.(1)
the difference in real long-term interest rates is a better indicator
of how unified the financial markets are.(2)
In his article, Fieleke shows that, from 1980 to 1994, rates on long-term
bonds in 19 countries were almost exactly the same. Consequently, because
the financial markets are integrated, risk-adjusted real interest rates
are similar in the major industrialized countries.
the other hand, not everybody shares this conclusion. Some indicators
suggest that markets are not as fully integrated as Fieleke suggests.
There is, in fact, a close correlation between the savings rate and the
level of investment. Thus, economies with low savings rates generally
also have a low level of investment. The converse is also true. However,
if capital were fully mobile, domestic savings would end up in the hands
of investors offering the best opportunities, often in foreign countries.
In reality, only 10% of the 500 largest portfolios in the world is invested
in foreign stocks.(3)
effect, regardless of who is right and whether or not the financial markets
make up a perfectly unified single global market that dictates a world
price for capital, it is certain that several billion dollars can be moved
from one part of the globe to another in a matter of minutes.
daily value of transactions in the foreign exchange markets increased
from US $640 billion in 1989 to a trillion dollars ($1,000 billion) in
1992.(4) Four years later,
everything suggests that the amounts changing hands daily on the world
capital market are even higher. In fact, the latest figures suggest that
the figure is now US$1.3 trillion.(5)
of all the financial and technological upheavals that have occurred, real
annual average growth in transactions in foreign currency, bonds and stocks
by far exceeds real average annual growth in economies and the value of
goods and services exported around the world. Between 1980 and 1982 average
annual growth in currency transactions exceeded the growth in economies
and the value of goods and services exported by 25% while growth in bond
transactions was 10% higher.(6)
During the same period the value of stock exchange transactions grew two
and a half times faster than the size of economies.
Table 1 and Chart 1 show, the proliferation in derivative instruments
is an important indicator of the globalization of capital. The nominal
value of transactions involving negotiable securities traded over the
counter alone was eight times greater in 1991 than in 1986. The value
of exchange-traded derivatives in the stock markets increased 600% over
the same period.(7)
In 1991, the total value of transactions was close to $8,000 billion and
by 1994 the value of transactions had already exceeded $20,000 billion.(8)
In terms of annual volume (Table 2), the market for futures on short-term
interest rate instruments grew by 517% from 16.4 billion transactions
annually in 1986 to 84.8 billion in 1991.(9)
It is not surprising, therefore, that such a large and integrated global
derivatives market exerts great influence on economies.
explanation for these huge capital movements is the extraordinary demand
for capital. In many countries these needs are greater than available
domestic savings. Because they are unable to obtain funds in domestic
markets, a number of countries are now forced to import capital. The stock
of government bonds in circulation on international markets, as a percentage
of international financial securities, increased from 18% in 1980 to 25%
in 1992.(10) Canada's financial
needs are no exception to this rule.
2 shows the sources and uses of savings in Canada in 1995. Public and
private needs for capital in that year were $158 billion. Because domestic
savings amounted to only $143 billion, Canada had to import $13 billion
in foreign capital.(11)
One year earlier Canada had had to import $22 billion from abroad.
1996, Canada recorded a surplus and could accordingly start to repay its
foreign debt. It will no longer have to borrow abroad to meet its needs
for capital. What characterizes Canada's public and private debt is the
share of the debt as a proportion of GDP that is held by foreigners; this
exceeded 40% of the total debt of $340 billion in 1994. The federal share
of this (including Crown corporations) was $135 billion, the provinces'
share was $155.2 billion and the municipal sector's share $6.6 billion.
can be seen in the bar chart reproduced below (Chart 3), in 1994-1995
over 25% of the federal government's total debt was held by foreign portfolio
managers. Ten years earlier this figure was only 11%. This increase can
be explained by the fact that, as the budget position of governments in
Canada deteriorated during the 1980s and early 1990s, and as private corporations
experienced a greater need for capital, the government of Canada had to
import capital from abroad on an increasing scale. Because the needs of
government made such major demands and as the budget situation of these
governments deteriorated, corporations also had to borrow increasingly
is not the only country that has had to import capital from abroad. Several
industrialized countries have also had to tap the markets. A country's
net capital flow (that is the difference between funds arriving from abroad
and those moved abroad) is equal to the balance of payments in the current
account. The current account balance includes the merchandise trade balance
(that is the difference between goods exported and goods imported) and
the non-merchandise trade balance(12)
(that is the net balance in services supplied outside Canada and arrivals
and departures of capital).
country that imports more than it exports must borrow on foreign markets
in order to fund this difference. This net import of capital is equal
to the current account deficit. Conversely, a country that exported capital
would show a surplus in its current account. Despite the fact that Canada
has a positive balance in merchandise trade, it had until recently a negative
current account balance. This situation can be explained by the fact that
the funds generated by exports of goods were not sufficient to finance
all of Canada's needs. In fact, the balance in non-merchandise trade was
much lower than that in merchandise trade. In effect, Canada's balance
in non-merchandise trade shows that, since the
between $24 and $41.4 billion have gone abroad. In 1995, the merchandise
trade balance exceeded $28.2 billion. In the same year, when Canada was
paying interest, it received only slightly over $16 billion from
dividends and profits abroad that amounted to over $49 billion. At
the same time Canadian tourists spent $16.5 billion abroad while foreign
tourists spent only $11.7 in this country. Canada also imported more
services from abroad than it exported. Given these figures, it is not
surprising that there is a deficit in non-merchandise trade so great that
it completely neutralizes any surplus in the merchandise trade balance;
this explains the repeated deficits in the current account balance.
the second quarter of 1996 (April to June), Canada's current account balance
showed a surplus of $1.15 billion. The merchandise trade surplus exceeded
$9.96 billion while the balance in non-merchandise trade showed a deficit
of $8.82 billion. On an annualized basis, Canada's current account surplus
is $4.58 billion (merchandise trade balance: $39.84 billion; balance in
non-merchandise trade: -$35.26 billion). Among the explanations for this
surplus are the recent declines in interest rates and improvements in
public finances. Governments in Canada are now borrowing less abroad.
is the first time since 1984 that Canada has enjoyed such surpluses. Only
three years ago, of the member countries of the G-7, Canada was the one
showing the largest current account deficit as a proportion of GDP. The
Scotia Bank now forecasts that in 1997 Canada will be one of the four
capital-exporting countries. Italy, Japan and France will also record
positive current account balances.
good news will improve the value of the Canadian dollar on the exchange
markets. Furthermore, if the surplus continues, the Bank of Canada will
be able to maintain interest rates with more of a downward trend than
those in the United States. Finally, Canadians can start paying back the
hundreds of billions of dollars they owe to foreigners.
3 illustrates the globalization of the financial markets by showing current
account balances as a percentage of GNP or of GDP in the member countries
of the G-7 and a few other selected countries from 1980 to 1994. These
balances clearly show the financial needs of a number of countries and
the importance of foreign capital in financing their domestic needs.
TRADITIONAL POWERS OF GOVERNMENT: A VANISHING SPECIES
addition to foreign affairs and national security, all modern governments
wish to have complete sovereignty to conduct and influence their social
and economic policy. On behalf of the citizens they represent, these governments
want to have every freedom to decide on and choose policies on taxation,
income redistribution, public spending, the size of the debt and the deficit,
interest rates, exchange rates and capital movements.
derive economic power from their ability to tax and regulate the financial
markets and their ability to issue bank notes and to borrow. Barely 25
years ago, governments had much greater freedom to govern than they have
now, and they could choose the economic policies they considered appropriate.
However, the world of finance has changed a great deal in a very short
time and the situation has changed entirely. According to the opponents
of the free market, it is precisely this market that limits the powers
and influence of government. One of them, Gregory Millman, describes the
situation as follows:
the vandals who conquered decadent Rome, the currency traders sweep
away economic empires that have lost their power to resist. Time
after time in country after country, when governments can't cope
with the new financial realities, traders are the agents of creative
destruction. Although investors have always had to take into consideration
the quality of a government's management of its economy, traders
now have an unprecedented degree of power to sweep the financial
foundations out from under poorly managed, politically unstable,
or uneconomic governments before the bureaucracy even know what
view is shared by a number of opponents of the financial markets.
is true that governments' discretionary powers and their influence on
policy have now been considerably reduced. First of all, the power to
tax is severely restricted when companies or individuals can easily move
their capital abroad. Second, the power to regulate the financial markets
does not mean much when typically millions of billions of electronic transactions
are concluded on them. Finally, the power to print money and to borrow
in order to finance a budget deficit to some extent no longer exists since
market forces can neutralize any monetary or tax policy that they consider
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agents do not like to see a country's monetary policy relaxed (for example,
because they feel it is inflationary), they will influence long-term interest
rates by divesting themselves of government bonds. Demand for these instruments
will decline and this will be reflected in a drop in the price of long-term
bonds and consequently in an increase in interest rates. In this way brokers
can neutralize any action of a central bank that was aimed, for example,
at reducing interest rates if they feel that such an approach is unwise.
seek the highest returns for their money. Regardless of where they are
on the globe, brokers who disapprove of a government's budget policy (for
example, because they feel it will worsen the deficit and ultimately lower
their returns) will force its currency and bonds into free fall simply
through a few electronic transactions. Thus, the slightest increase in
Canada's or a province's deficit or even the slightest increase in the
tax burden would pose major risks. The bonds held by foreigners probably
have a greater turnover rate than bonds held by Canadians. Consequently,
the slightest variation in risk leads to rapid adjustments. The financial
markets would therefore react vigorously to any decline in Canada's budget
the market will reward any move towards an increase in real returns caused
by a reduction in the deficit or any monetary policy that encourages the
tendency to save since these policies will reduce inflationary tensions
and improve the current account balance. Thus, the spread between Canadian
and American interest rates has grown much smaller. In fact, we have never
before seen such a small differential in bond prices. The financial markets
ended by recognizing the serious efforts being made by governments in
Canada to reform their budgets. As a result, investors are now prepared
to accept a lower return on their Canadian investments because of the
fiscal and monetary levers used in the past are no longer under the control
of governments and opponents of the global financial market forces would
like to win back this control. It is true that with the globalization
of financial markets, financial innovations and the information revolution,
market forces of the financial market will in future hold the balance
of power between governments. There are, however, benefits resulting from
this great financial market, such as access to greater pools of capital
for business expansion. Governments can reap the benefits that market
forces have on monetary and tax policies.
POSITIVE IMPACT OF THE GLOBALIZATION OF FINANCIAL
MARKETS ON MONETARY POLICY
year, during the federal government's pre-budget consultations, a number
of participants suggest that the Bank of Canada should relax its monetary
policy. They claim that the Bank would merely have to reduce interest
rates unilaterally for the country's budget problems to be solved, the
economy to grow and jobs to be created. In their view, interest rates
are far too high and suffocate any chance of growth. On the other hand,
they argue that excessively high interest rates increase the cost of servicing
the public debt; they feel that, by reducing these rates, the government
could reduce debt-servicing costs and stimulate overall demand and economic
growth. In order to reduce interest rates, the Bank of Canada would, in
their view, only have to print money so that the dollar would be less
if the Bank reduced interest rates when this was not called for, it would
risk overheating the economy. Because financial markets would be gripped
by nervousness, the artificially created economic growth would not last
very long. In an attempt to protect themselves against the risk of a recurrence
of inflation, the holders of Canadian securities would dispose of them,
thus exerting upward pressure on long-term interest rates and downward
pressure on the value of the Canadian dollar and neutralizing any attempt
to loosen monetary policy. In effect, then, a reduction in interest rates
would neither reduce unemployment nor boost the Canadian economy. Action
of this kind by the Bank would jeopardize the low inflation rate and have
serious economic consequences. Markets do not forgive unfounded actions.
If governments wish to influence job creation and stimulate economic growth,
they can concentrate on price stability, tax policy and sound public finances.
In the medium term such stability will create an environment conducive
to job creation, growth and investment.
the globalization of financial markets and flexible exchange rates, governments
can reduce interest rates, if the situation calls for such action, without
suffering harmful consequences. Thus, in 1995, the Bank of Canada relaxed
its monetary policy when authorities found that it had been too restrictive.
When the central bank reduced interest rates, the essential prerequisites
for price stability were already in place. There was surplus production
capacity, which had been underestimated. Because the Canadian economy
had grown less than expected, there was an increase in unused resources
in the labour market and in surplus production capacity. The financial
markets were convinced that the Bank of Canada was acting cautiously and
that this downward adjustment in the base rate would not threaten the
fundamental objective of promoting a rate of growth in the money supply
that would not force inflation rates beyond the 1 to 3% range until late
1988. If they had not believed that the reduction was justified, the markets
would never have tolerated such a risky move. The economic situation,
expectations and the perception of the markets determine how much room
the central bank has to manoeuvre.
is important to note that the Bank of Canada can have a direct influence
on very short-term rates (such as one-day rates). Beyond that, its influence
is very indirect. For example, in the case of long-term rates (such as
rates on ten-year bonds), the central bank acts through inflationary expectations.
It can influence these expectations by showing the financial markets that
inflation is in check. If the markets feel that there is a risk of inflation,
they will force increases in long-term interest rates through their activities
in the bond markets. To some extent, markets act as automatic stabilizers
since this sudden increase in long-term rates limits the economy much
more quickly than the gradual increase in short-term rates that would
have been imposed by a central bank. Unavoidable market forces neutralize
any monetary policy that is felt to be unwise.
central banks must choose policies that guarantee price stability (a policy
that will be rewarded by the financial markets). They do not have the
luxury of opting for expansionary monetary policy that would damage inflationary
expectations (a risky policy that would be roundly condemned). Market
forces must accordingly be viewed as partners guiding the central banks
when they flirt with price instability.
POSITIVE IMPACT OF THE GLOBALIZATION OF
FINANCIAL MARKETS ON TAX POLICY
globalization of the market for capital also allows governments to fund
their debt and their current account deficits much more cheaply than they
could formerly. Thanks to this major pool of international capital, even
governments with serious budget problems can easily borrow at lower cost
because good governments to some extent subsidize the cost of capital.
The slightest differential in the interest rates offered to investors
will attract foreign capital. The paradox is that this free access to
international capital can also harm economies because governments can
grow increasingly big. Because of their easy access to capital, countries
like the United States became net borrowers in the early 1980s.(14)
there can be no doubt that in the final analysis the globalization of
the markets limits the possibility of government intervention. As the
budget situation grows worse, the ability to borrow is reduced. The time
comes when the markets no longer tolerate a budget situation that they
consider to be dangerous. When this happens, governments must often cut
spending and reduce government activity by redefining the role of government
and privatizing a host of public activities, for example.
country's budgetary health influences movements of capital. Because foreign
investors have major portfolios, it should not come as a surprise that
they are vulnerable when the budget situation of a government goes from
bad to worse. In a situation such as that in Canada, where until very
recently the public debt was growing more quickly than the ability to
repay it, any increase in the deficit increased government financial needs
by billions of dollars. Even a slight deterioration in the financial situation
of a heavily indebted government could mean a major decline in bond prices,
which would lead to a significant increase in interest rates and de
facto an increase in the cost of servicing the public debt. Canada
is not immune to this risk.
governments borrow capital, the markets grow concerned because a government's
ability to pay and repay is correspondingly reduced. Coping with these
major financial obligations becomes difficult and the time comes when
the markets are not going to tolerate it any more. A crisis of confidence
follows. As David Dodge said in 1993:
sort of come up against and hit a wall and, bingo, you're in terrible
troubles. ... You go a long, long way, and then the cliff is very
steep. We're working at night here and you never quite know exactly
where the edge of the cliff is. All I can say is that we're near
enough to the edge that you can smell the sea out there somewhere,
so we would be ill advised to get any nearer to the edge of the
Zealand, Italy, Mexico and Sweden have already found themselves in this
number of options available to a government in this tight corner is extremely
limited. Since it is so deeply in debt, it could attempt to solve the
problem by raising taxes on individuals and companies. However, because
of the globalization of the financial markets, it cannot impose tax increases
that are disproportionate to the rates in other countries. In fact, because
capital is very mobile, a business can move some of its operations to
other countries where the corporate tax burden is relatively less onerous.
also become concerned when an indebted government could, out of desperation,
choose policies that run the risk of fuelling inflation. Rather than cutting
spending in order to solve its budget problems, a government that is short
of ideas might be tempted to stimulate its economy, increase public spending,
cut interest rates, monetize the debt, impose restrictions on movements
of capital or force banks to hold a big percentage of government bonds.
Because of their fear that such policies would cause even further damage
to already precarious government finances, the markets would simply dispose
of their bonds.
the point of view of government policy, this fear felt by the markets
in response to budget problems means that a government can lose a number
of the counter-cyclical economic levers used, for example, in a recession.
Thus, because they are afraid that the unease about the budget will subside,
the financial markets will no longer allow a government that does not
have the ability to pay for its spending to increase public expenditures
even to improve the social security net in a very severe economic slow-down.
is a paradox that the solution to a country's economic problems often
lies in spending cuts rather than in stimulating the economy. For a number
of heavily indebted countries, cuts in public spending might stimulate
the economy because they would have the effect of reducing interest rates
and debt-servicing costs. This reduction in interest rates would lead
to the stimulating effect.
provides a good illustration of this paradox. The position of the current
account balance has been improving steadily since 1993 and interest rates
have fallen or held steady. The people of Canada are beginning to enjoy
the benefits of sound management of government finances, hard though this
may be to swallow. It is wrong to see the restraints imposed by the world
of international finance as bad in themselves but rather as providing
protection against harmful tax policies.
Gregory Millman states:
bounty hunters in the Old West, the traders endorse the economic
law not for love of law, but for profit. They have only one goal
-- making money. [Traders] are financial vigilantes. Because governments
could not provide financial law and order, traders took the law
into their own hands. They sell protection at a price.(16)
order to control these forces better, opponents of the free market, such
as Millman, say that it is time for governments to control movements of
capital and to tax financial transactions. They think that by putting
an end to speculative transactions, governments will regain their full
sovereignty. On this subject, the Governor of the Bank of Canada stated
in his testimony to the Standing Committee on Finance one year ago that:
Tobin tax, which is to try to discourage currency-related flows,
is not going to discourage speculators. It could in fact be harmful
for the ordinary transactions. The real problem is that financial
transactions frequently get done at very narrow margins. So your
ordinary run-of-the-mill financial transaction, ... tends to be
done at very narrow margins.
activity frequently is in search of very large gain, so you would
have to have a Tobin tax that was incredibly large if you were going
to discourage the speculative movements. ... [Y]ou would discourage
all legitimate financial transactions.(17)
a tax would impede the mobility of capital and increase its cost. It is
impossible, in fact, to go after speculative transactions alone; consequently,
all transactions, whether good or bad, would be affected if a tax were
imposed. On the other hand, rather than stabilizing currencies, such a
tax could destabilize the markets through a lack of liquidity. The solution,
then, does not lie in controls on movements of capital.
market forces can be very useful in constraining governments from acting
without a sound basis and do not hesitate to punish governments acting
without such a basis. They force governments to make choices. Policies
that ensure stability do attract capital inflows. Governments can choose
other paths, but they must then live with the consequences.
the markets are convinced that inflation is fully under control, access
to capital will be facilitated. Canada offers a good example of this situation.
Because market forces are now convinced that the policy adopted by the
Bank of Canada is credible and will prevent any recurrence of inflation,
Canada's obligatory markets have been able to resist recent upheavals.
Despite changes in the American market, the Canadian dollar has rarely
been as stable as it is at the present time. Some people anticipate that
there will be major interest rate hikes in the United States. Canada will
be able to resist this upward pressure. Because the markets are increasingly
convinced that Canada has succeeded in checking inflation and that the
current account balance and the state of government finance is constantly
improving, it is unlikely that the rate increases in the United States
will put upward pressure on Canadian rates. At the very most, rates will
stabilize. The markets will not be as demanding with respect to Canada
as they will to our neighbours to the south.
markets also like to be reassured periodically. Governments must display
openness in their tax and monetary policies (as Canada did in adopting
a target range for inflation and a deficit:GDP ratio) and publish their
accounts on a regular basis (as the Bank of Canada does by publishing
a semi-annual Report on Monetary Policy and the government of Canada does
by publishing an economic and financial update). The markets can in this
way determine whether or not governments are achieving their objectives.
What is even more important is the fact that, because the authorities
publish the relevant information, market forces will always react promptly;
thus, the remedy they impose will be easier to swallow.
a situation where government finance is administered soundly and inflation
is held in check, governments can govern freely, as they always have done.
If a government has the resources to build bridges and create health systems
and universities, the markets will not react against such efforts.
a government spends too much and has lost control of its finances or is
handling inflation badly, market forces will make themselves heard. Government
always has the option of applying whatever policy it chooses, but it cannot
prevent market forces from reacting to those policies.
for International Settlements. International Capital Flows, Exchange
Rate Determination and Persistent Current-Account Imbalances. Basel,
for International Settlements. Recent Developments in International
Interbank Relations. Basel, June 1990.
Department of Finance. Economic and Financial Update. Ottawa, 6 December
John, "The Currency Wars." Harvard Business Review, March-April
1995, p. 44-151.
Norman S. "International Capital Movements: How Shocking Are They?"
New England Economic Review, Federal Reserve Bank of Boston, March-April
1996, p. 41-60.
Gregory J. The Vandals' Crown: How Rebel Currency Traders Overthrew
the World's Central Banks. The Free Press, New York, 1995.
Trends in the Financial Markets. Paris, November 1995, No. 2.
James. The Tobin Tax on International Monetary Transactions. Canadian
Centre for Research on Exchange Policy, 10 p.
in the Driving Seat?" The Economist, Survey, The World Economy.
7-13 October 1995.
Norman S. Fieleke, "International Capital Movements: How Shocking
Are They?" New England Economic Review, Federal Reserve Bank
of Boston, March-April 1996, p. 42-43.
It is possible to speak of ex-post real interest rates (the nominal
rate paid to investors minus the observed inflation rate) or ex-ante
(the nominal interest rate minus the forecast inflation rate, which is
based on historical trends and the target spreads used by central banks).
Investment and savings decisions are based on expectations. Accordingly,
the real ex-ante interest rates must be used in comparing rates
"Who's in the Driving Seat," The Economist, Survey of the
World Economy, 7-13 October 1995, p. 6.
In 1992, exchange dealers handled US $880 billion in currency and $200
billion in bonds every day ("Who's in the Driving Seat?" (1995),
p. 4). See also John Calverley, "The Currency Wars," Harvard
Business Review, March-April 1995, p. 146.
"Who's in the Driving Seat?," (1995), p. 10.
Ibid., p. 4.
Bank for International Settlements, Recent Developments in International
Interbank Relations, Basel, June 1990, Table 6, p. 49.
"Who's in the Driving Seat?" (1995), p. 9.
Recent Developments in International Interbank Relations (1990), Table
12, p. 55.
"Who's in the Driving Seat?" (1995), p. 10.
The current situation has improved considerably over 1994. The reduction
noted in 1995 may be explained by the reduction in the public sector deficit
and by an increase in the level of domestic savings. On the other hand,
in 1994, Canada's trade balance had improved a great deal since the previous
year. (In 1993, the trade balance was $9.3 billion in Canada's favour,
while in 1994 it was $15 billion and in 1995 $28.2 billion.)
The invisible trade balance includes the following items: the balance
of services (including the tourism balance), the balance of investment
income (including dividends and profits), and the balance of transfers
(including estates and capital moving from and to foreign countries).
Gregory J. Millman, The Vandals' Crown: How Rebel Currency Traders
Overthrew the World's Central Banks, The Free Press, New York, 1995,
With a fixed exchange rate system, such as existed between 1944 and 1972
under the Bretton Woods Agreement, where international capital movements
were limited, governments had to finance current account deficits from
the capital available on the domestically and their reserves
Standing Committee on Finance, Record of Proceedings and Testimony,
1 June 1993, p. 65:35.
Millman (1995), p. xiii.
Standing Committee on Finance, Record of Proceedings and Testimony,
5 May 1995, p. 134:20-21.