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Would a Tobin Tax Have Saved the EMS?

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  • Jeanne, Olivier

Abstract

This paper scrutinizes the claim by Eichengreen, Tobin and Wyplosz (1995) that a small tax on foreign exchange transactions would help to stabilize the European Monetary System. We present a target zone model a la Svensson (1994) in which an optimizing government is faced with a trade-off between its foreign exchange and its domestic objectives. The introduction of a Tobin tax is shown to improve the credibility of the peg by relaxing the foreign exchange rate constraint and making it less costly for the government to stay in the fixed exchange rate system. We calibrate the model using data on the French franc in 1991-93, and show that the stabilizing effect of a 0.1% Tobin tax would have been quite sizeable. Copyright 1996 by The editors of the Scandinavian Journal of Economics.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 98 (1996)
Issue (Month): 4 (December)
Pages: 503-20

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Handle: RePEc:bla:scandj:v:98:y:1996:i:4:p:503-20

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Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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Web: http://www.blackwellpublishing.com/subs.asp?ref=0347-0520

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Cited by:
  1. Allsopp, Louise, 2002. "Common knowledge and the value of defending a fixed exchange rate--an explanation of a currency crisis," Journal of Macroeconomics, Elsevier, vol. 24(1), pages 67-79, March.
  2. Jeanne, Olivier, 1999. "Currency Crises: A Perspective on Recent Theoretical Developments," CEPR Discussion Papers 2170, C.E.P.R. Discussion Papers.
  3. Flandreau, Marc & Komlos, John, 2005. "Target Zones in Theory and History: Credibility, Efficiency, and Policy Autonomy," CEPR Discussion Papers 5199, C.E.P.R. Discussion Papers.

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