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Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure

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  • Alexander Mende
  • Lukas Menkhoff

Abstract

There are strong calls for the introduction of a ‘Tobin tax’ on foreign exchange (FX) transactions. Despite its popularity, research has not yet made full use of available insights from the recent microstructure literature. The role of banks in FX trading is quite different from the assumptions of proponents. Asset managers are most probably the group with the heaviest influence on shorter‐term exchange rate movements. They speculate under comparatively longer horizons than FX dealers, although their behaviour also tends to be short‐termist. We argue that there is no tax rate that could both influence their behaviour and simultaneously maintain the desired high level of liquidity. We conclude that no uniform proportional Tobin tax can achieve its objectives.

Suggested Citation

  • Alexander Mende & Lukas Menkhoff, 2003. "Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure," International Finance, Wiley Blackwell, vol. 6(2), pages 227-247, July.
    • Handle: RePEc:bla:intfin:v:6:y:2003:i:2:p:227-247
    DOI: 10.1111/1468-2362.00116
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    1. G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005. "Tobin tax and market depth," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 213-218.
    2. Olivier Damette & St鰨ane Goutte, 2015. "Tobin tax and trading volume tightening: a reassessment," Applied Economics, Taylor & Francis Journals, vol. 47(29), pages 3124-3141, June.
    3. Bianconi, Ginestra & Galla, Tobias & Marsili, Matteo & Pin, Paolo, 2009. "Effects of Tobin taxes in minority game markets," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 231-240, May.
    4. Ms. Thornton Matheson, 2011. "Taxing Financial Transactions: Issues and Evidence," IMF Working Papers 2011/054, International Monetary Fund.
    5. Ginestra Bianconi & Tobias Galla & Matteo Marsili, 2006. "Effects of Tobin Taxes in Minority Game markets," Papers cond-mat/0603134, arXiv.org.
    6. Damette, Olivier, 2016. "Mixture Distribution Hypothesis And The Impact Of A Tobin Tax On Exchange Rate Volatility: A Reassessment," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1600-1622, September.
    7. FitzGerald, John & Central Bank Staff, 2012. "The EU Financial Transactions Tax Proposal: A Preliminary Evaluation," Research Series, Economic and Social Research Institute (ESRI), number BKMNEXT217, June.
    8. Olivier Damette & Beum-Jo Park, 2015. "Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework," Review of International Economics, Wiley Blackwell, vol. 23(5), pages 996-1022, November.
    9. Olivier Damette, 2009. "Exchange rate volatility and noise traders: Currency Transaction Tax as an eviction device," Economics Bulletin, AccessEcon, vol. 29(3), pages 2449-2464.

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