The Economics of Offshore Financial Services and the Choice of Tax, Currency, and Exchange-Rate Regimes

Abstract

Open-economy macroeconomists regularly invoke the policy trilemma that states that governments cannot simultaneously maintain an open capital account, a fixed exchange rate, and a domestically-oriented monetary policy. My thesis is that jurisdictions with substantial offshore activities find these and other macroeconomic choices significantly affected by something else: Concern for the continued health and development of their international financial business. Monetary, exchange-rate, and tax policies and the choice of domestic currency all will be impacted by this concern. The different choices made by (1) Denmark and Malta in ERM II, (2) offshore financial centers in Europe, and (3) financial centers in East Asia are considered to develop some general conclusions.

Keywords: Offshore financial centers, international financial services, exchange-rate regime, taxation of nonresidents, currency substitution

JEL Classification: F31, F33, F36, F53, G10