The economic and legal implications of speculative capital flows
du Boulay, Andrew (2013) The economic and legal implications of speculative capital flows. PhD thesis, James Cook University.
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Abstract
This thesis employs the disciplines of Law and Economics to analyse the effects and implications of speculative capital flows (SCF). Using descriptive analysis as part of its methodology, it covers matters relating to: globalisation, macroeconomics, the international monetary and financial system (IMS), the international monetary market (IMM), foreign exchange trading, financial stability, international monetary law, prudential regulation, case law and legal and economic philosophy.
The global financial crisis of 2008 (GFC) demonstrated that there are several areas of weakness within the international monetary and financial system. Notwithstanding the variety of problems, this dissertation focuses primarily on the practise of moving speculative capital around the world to gain a profit and examines what effect that has on national economies and what should be done to reduce the impact of those practices. The thesis uses the Efficient Market Hypothesis, the Balance of Payments Equation and the Mundell Fleming IS-LM-BP Model to highlight the effects of speculative capital flows on national economies.
The legal argument advanced in the thesis is that: for several decades speculative capital flows have become increasingly destabilising to the global economy, and that State Responsibility and the doctrine of due diligence imposed by the mandates of international monetary law can, and should, be employed to help rectify this problem.
The thesis evaluates several options to minimise exchange rate volatility and shows how financial instability attributed to current practises might be curtailed through enhanced regulation. The thesis argues that enforcing the provisions already contained within international monetary law would help reform the framework through which the international monetary market operates; it is both economically warranted and legally justifiable. Not only might reform help stabilise the international monetary system, it could also create a more equitable and robust environment in which the global economy could flourish.
The dissertation revisits the Social Contract theories prescribed by John Locke, Charles-Louis de Secondat and Adam Smith. The work of Vilfredo Pareto and his theory of Optimality, Nicholas Kaldor's and John Hicks's modified version of Cost Benefit Efficiency and Richard Posner's Economic Analysis of Law are applied to speculative capital flows. The philosophical and rational expectation arguments support the need for more control over financial markets and that legislators must be pro-active in pursuing that goal.
The discourse examines what alternatives are available for reducing the destabilising effects of speculative capital flows. The thesis analyses capital controls, the adoption of Tobin type taxes, more currency unions, and a single world currency. It describes how the regulatory requirements for international finance are lagging behind market advancements and identifies deficiencies within global prudential regulation. Henceforth, the laws (both international and domestic) must catch up to current market practises. The thesis applies three theories for regulatory reform, these being: Ian Ayres' and John Braithwaite's Regulatory Pyramid, Stuart Umpleby's application of Requisite Variety, and Anne-Marie Slaughter's concept of a New World Order. The combination of those propositions guides the research towards the necessary components for an effective regulatory framework suitable for addressing the issue of speculative capital flows and financial stability within the global economy. The thesis makes recommendations but concludes that while international dialogue has increased since the global financial crisis and prudential supervision of global markets has become an agenda item for discussion in G20 countries, any proposals or strategies for improving financial stability, reducing foreign exchange volatility and transaction costs within the global economy remain typically at the discretion of G7 leaders.
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