Income Taxes, Interest Rate Parity, and the Allocation of International Savings in Industrial Countries

The internationalization of the financial markets of the industrial countries has greatly increased the mobility of financial capital and has made the concept of interest rate parity one of more than just theoretical significance. Given interest rate parity, decisions concerning the generation, distribution, and utilization of the international pool of financial savings should all be made in relation to the international level of the rate of interest. The paper shows what happens to this idealized picture when interest incomes are taxed and interest expenses are deductible as they are in industrial countries