Monetary cooperation and liberalization of capital movements in the european monetary system

Liberalization of capital movements is examined in an old-fashioned way. Taxes on foreign investments are treated in a way that was fashionable in the 1960s, as it is assumed that liberalization of capital movements is tantamount to elimination of effective wedges between domestic and foreign interest rates. The issue of liberalization is connected to the issue of why countries already constrained by a customs union, such as the European Economic Community (EEC), should decide to deprive themselves of an effective instrument for regulating their economies. Although controls on capital movements are valuable, it may be a good strategy to forego it in order to induce the partner countries to cooperate in other fields of economic policy. The elimination of the distortion, in this case, liberalization of capital movements, although it may not constitute in itself a movement toward efficiency, could induce elimination of other economic distortions and thus be justified.