TITLE:
The Domestic Tax Code, Foreign Exchange Dynamics and Flow of Funds across Countries
AUTHORS:
Elli Kraizberg
KEYWORDS:
Tax Code, Foreign Exchange, Capital Flows
JOURNAL NAME:
Theoretical Economics Letters,
Vol.9 No.5,
June
25,
2019
ABSTRACT: Integrating tax methodology and foreign exchange
rates dynamics, and utilizing Miller and Scholes [1] framework, we are able to
derive a testable algorithm that identifies financial flow of funds across
countries, which in turn leads to short term changes in exchange rates. In this
model we are going to identify changes in the flow of funds, directed toward
financial investments, lending or borrowing, between two countries, and thereby
the short term changes in the foreign exchange rate that solely stems from expected changes in
the tax codes. Thus, expected change in the foreign exchange rate becomes an
endogenous variable, while the common view in the literature is that expected
change in foreign exchange rates that differs from the market consensus is the
trigger for flows of funds across countries. Alternatively, by using the above-mentioned
algorithm, one can imply the market beliefs regarding expected changes in the
tax code.