Macroeconomic Effects of a Tax on Bond Interest Rates

A Survey of Academic Literatureon Controls Over International Capital Transactions

“…Second, in the absence of the implicit subsidy generated by controls over capital outflows, the government would be forced to choose revenue from inflation as the best alternative for meeting higher real debt service costs. Similar results are derived from an overlapping generations model developed by Sussman (1991). Aizenman and Guidotti (1994) argue that collection costs associated with taxes other than the inflation tax might make capital controls a part of an optimal tax system.…”

“…In the spirit of the sticky price framework, a way to understand a link between liberalization and real exchange rate appreciation is to appeal to a model in which nominal shocks generate overshooting of nominal exchange rates and therefore changes in real exchange rates. Sussman (1992) uses a version of the Dornbusch overshooting model to help explain an apparently unsuccessful liberalization of the capital account in Israel in 1977. Liberalization of the capital account in this model takes the form of eliminating controls that had supported a tax on domestic asset yields and domestic bank loans.…”

Financial Regulation and Government Revenue: The Effects of a Policy Change in Ethiopia

“…They relate financial liberalization to reserve ratios, inflation rates, and government debt, and propose a model to explain the setting of the optimal seigniorage tax. Their findings show that liberalization can be detrimental for welfare under some conditions and that reserve ratios can be increased prior to liberalization, this results recall the assessment of Sussman (1991). A similar conclusion is achieved by Mourmouras and Russell (1992), whom consider a the role of optimal reserve requirements rather than a direct taxation of the banking system to finance government expenditure.…”

Economic Effects and Structural Determinants of Capital Controls

“…The model is a variant of Diamond's (1965) overlapping generations model. Related models are presented in Persson (1985), and Sussman (1991). We focus on a small open economy, in which capital controls take the form of a tax on foreign assets' holdings.…”

“…2/ Using an overlapping-generations framework, Sussman (1991) also suggests that capital controls (in the form of a tax on interest-bearing foreign assets, accompanied by a tax on domestic assets) reduce debt service and increase the demand for money. underdeveloped and repressed financial system allows the government to finance public expenditure more easily when the tax system is inefficient, but it may constitute an obstacle to growth.…”