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Capital market integration and fiscal sustainability

Kazutoshi Miyazawa (), Hikaru Ogawa and Toshiki Tamai

European Economic Review, 2019, vol. 120, issue C

Abstract: By constructing a two-country endogenous growth model with a debt-financing government, this paper studies the relationship between the sustainability of public finance and increases in inter-regional factor mobility. To this end, it identifies the minimum tax rate that ensures fiscal sustainability against the backdrop of capital tax competition and studies whether competition for mobile capital lowers or improves fiscal sustainability. The main findings are as follows: (i) when countries are symmetric, increasing capital flows promotes economic growth through the expansion of Romer-type knowledge spillovers, resulting in increased fiscal sustainability in all countries; and (ii) when a marked difference exists between countries, tax competition caused by capital movements might lower fiscal sustainability in a country with abundant capital and large outstanding debt.

Keywords: Tax competition; Fiscal sustainability (search for similar items in EconPapers)
JEL-codes: E62 F21 F62 H63 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.euroecorev.2019.103305

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