Nonlinear Capital Flow Tax: Capital Flow Management and Financial Crisis Prevention in China
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AbstractHow to promote capital account liberalization while preventing financial crises is a challenging task for policymakers. This study proposes a nonlinear (progressive) capital flow tax as a solution. We first demonstrate that the collateral requirement of international borrowing can give rise to multiple equilibria and self‐fulfilling financial crises. We then show that the crisis equilibrium characterized by large exchange rate depreciation, capital flight and welfare loss can be eliminated by imposing a nonlinear (progressive) tax scheme on capital outflows with the marginal tax rate increasing with the size of individual capital outflows. The implementation of such a tax scheme in China is also discussed.
All Author(s) ListJiandong Ju, Li Li, Guangyu Nie, Kang Shi, Shang-jin Wei
Journal nameChina and World Economy
Volume Number27
Issue Number4
Pages1 - 28
LanguagesEnglish-United States

Last updated on 2021-17-09 at 23:56