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

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 will all 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.