The analysis of international capital markets: Understanding Europe's role in the global economy

The rapid growth in international capital flows has outpaced theoretical efforts to model the markets that intermediate these flows. The objective of this Network is to improve understanding of the operation of international capital markets and the implications for macroeconomic behaviour and the formation of financial regulation and taxation policies.
The Network will develop microfounded models of international financial markets to identify the factors determining the level, volatility and composition of capital flows. Moreover, it will explore the macroeconomic consequences of international market frictions for growth, risk-sharing and business cycles. The Network intends to develop and test empirical specifications, exploiting new private- and public-sector databases.
International trade in goods and assets has a large impact on macroeconomic behaviour. The intention is to build on the new wave of dynamic general equilibrium open-economy macroeconomic models that incorporate nominal rigidities to establish a new framework for analysis of international macrointerdependence.
Responsibility for international financial stability must be shared among the leading market participants. In particular, issuers of international currencies (the US dollar, the euro, the yen) have a special role in providing liquidity to the international system. The Network intends to address the institutional design and policy coordination questions involved in assuring international financial stability. This will be reinforced by empirical work on the effectiveness of IMF surveillance policies and the determinants of contagion patterns during crisis episodes.
Finally, the implications for tax systems will be studied. Among the key issues are the taxation of footloose firms, investment income and the implications of restrictions on capital taxation for labour taxes. The sensitivity of capital flows to tax structures and the potential role of tax instruments in improving the stability of the international financial system will also be investigated.