If the choice of domestic versus foreign money and capital market instruments was on the basis of covered yields, funds would universally flow in one direction, from the smallest incentive, to the instruments of highest yields. This paper shows the consequences of different rates of taxation on interest and on exchange gains, the two components of foreign yields. By reference to the U.S.-Canadian situation it is shown how we might observe taxpayers in both countries simultaneously buying securities of the other, or simultaneously buying their own domestic securities. It is also shown how we might find taxpayers of both countries buying the securities with the lower pretax yields.

The coincidence of high rates of unemployment and high rates of inflation, seemingly apparent in several countries for sustained periods of time, has led to a rethinking of the Phillips curve. One explanation for the appearance of a positive association between unemployment and inflation, advanced by Milton Friedman in his Nobel lecture, involves an observed linkage between the level and the variability in inflation. This note is an attempt to test whether inflation uncertainty, which should be related to variability, could explain the observed patterns of inflation and employment. It is shown that inflation uncertainty is negatively related to employment, and that failure to consider uncertainty of inflation can obscure the effect of inflation forecast errors on employment.

Interest rates; Inflation (Finance)