Integrating tax methodology and foreign exchange rates dynamics, and utilizing\nMiller and Scholes [1] framework, we are able to derive a testable algorithm\nthat identifies financial flow of funds across countries, which in turn\nleads to short term changes in exchange rates. In this model we are going to\nidentify changes in the flow of funds, directed toward financial investments,\nlending or borrowing, between two countries, and thereby the short term\nchanges in the foreign exchange rate that solely stems from expected changes\nin the tax codes. Thus, expected change in the foreign exchange rate becomes\nan endogenous variable, while the common view in the literature is that expected\nchange in foreign exchange rates that differs from the market consensus\nis the trigger for flows of funds across countries. Alternatively, by using\nthe above-mentioned algorithm, one can imply the market beliefs regarding\nexpected changes in the tax code.
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