Entry cost, the Tobin tax, and noise trading in the foreign exchange market
AbstractTwo types of policy have been proposed to eliminate noise trading in the foreign exchange market: increasing the entry cost or imposing a `Tobin tax' type of transaction tax. In this paper, we endogenize entry decisions of both informed traders and noise traders and show that these policies may be ineffective in reducing exchange rate volatility. This is because these policies will discourage the entry of all traders, so they may not change the relative ratio of traders, or they may affect informed traders disproportionately more, which increases the relative ratio of noise traders and exchange rate volatility.
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Bibliographic InfoArticle provided by Canadian Economics Association in its journal Canadian Journal of Economics.
Volume (Year): 42 (2009)
Issue (Month): 4 (November)
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- F3 - International Economics - - International Finance
- G1 - Financial Economics - - General Financial Markets
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- Olivier Damette, 2013. "Mixture distribution hypothesis and the impact of a Tobin tax on exhange rate volatility : a reassessment," Working Papers of BETA 2013-07, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
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