Exchange rate volatility and noise traders: Currency Transaction Tax as an eviction device
AbstractThe aim of the paper is to identify the impact of the currency transaction tax on the foreign exchange structure and thus its impact on exchange rate volatility. In a noise trading framework a la Jeanne and Rose (2002), we explain that the exchange rate volatility depends on fundamentals volatility and extra volatility due to the behaviour of noise traders. The exchange rate volatility is lower after introducing a Currency Transaction Tax as it increases the entry cost of noise traders and influences the range of possible equilibria. While there are multiple equilibria of exchange rate volatility without Currency Tax, there are only two aggregate exchange rate volatility corner equilibria after introducing a CTT. One of them is a low exchange rate volatility equilibrium. Moreover, we prove analytically the existence of an optimal tax rate for which the exchange rate volatility depends solely on fundamentals variance. In this case, few noise traders enter the market and there is consequently a low excess volatility.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 29 (2009)
Issue (Month): 3 ()
Contact details of provider:
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frank Westerhoff, 2003.
"Heterogeneous traders and the Tobin tax,"
Journal of Evolutionary Economics,
Springer, vol. 13(1), pages 53-70, 02.
- De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990.
"Noise Trader Risk in Financial Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 98(4), pages 703-38, August.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
- Jeffrey Frankel., 1995.
"How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?,"
Center for International and Development Economics Research (CIDER) Working Papers
C95-058, University of California at Berkeley.
- Jeffrey A. Frankel, 1996. "How Well do Foreign Exchange Markets Function: Might a Tobin Tax Help?," NBER Working Papers 5422, National Bureau of Economic Research, Inc.
- Chen, Shiu-Sheng, 2007. "A note on interest rate defense policy and exchange rate volatility," Economic Modelling, Elsevier, vol. 24(5), pages 768-777, September.
- Markku Lanne & Timo Vesala, 2010.
"The effect of a transaction tax on exchange rate volatility,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 15(2), pages 123-133.
- Lanne , Markku & Vesala , Timo, 2006. "The effect of a transaction tax on exchange rate volatility," Research Discussion Papers 11/2006, Bank of Finland.
- Markku Lanne & Timo Vesalay, 2005. "The Effect of a Transaction Tax on Exchange Rate Volatility," Economics Working Papers ECO2005/19, European University Institute.
- Frank Westerhoff, 2004.
"The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach,"
Computing in Economics and Finance 2004
14, Society for Computational Economics.
- Westerhoff, Frank H. & Dieci, Roberto, 2006. "The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 293-322, February.
- Hau, Harald, 2002.
"The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse,"
CEPR Discussion Papers
3651, C.E.P.R. Discussion Papers.
- Harald Hau, 2006. "The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 862-890, 06.
- Christopher J. Neely & Lucio Sarno, 2002.
"How well do monetary fundamentals forecast exchange rates?,"
Federal Reserve Bank of St. Louis, issue Sep, pages 51-74.
- Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Working Papers 2002-007, Federal Reserve Bank of St. Louis.
- Michael Hanke & J?rgen Huber & Michael Kirchler & Matthias Sutter, 2007.
"The economic consequences of a Tobin tax - An experimental analysis,"
2007-18, Faculty of Economics and Statistics, University of Innsbruck.
- Hanke, Michael & Huber, Jürgen & Kirchler, Michael & Sutter, Matthias, 2010. "The economic consequences of a Tobin tax--An experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 74(1-2), pages 58-71, May.
- repec:uba:hadfwe:techtrademonpol_2003-07 is not listed on IDEAS
- Mende, Alexander & Menkhoff, Lukas, 2003. "Tobin Tax Effects Seen from the Foreign Exchange Market's Microstructure," International Finance, Wiley Blackwell, vol. 6(2), pages 227-47, Summer.
- G. Bird & R. Rajan, 2001. "Would International Currency Taxation and Currency Stabilisation in Developing Countries?," The Journal of Development Studies, Taylor and Francis Journals, vol. 37(3), pages 21-38.
- G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005.
"Tobin tax and market depth,"
Taylor and Francis Journals, vol. 5(2), pages 213-218.
- James Tobin, 1978.
"A Proposal for International Monetary Reform,"
Cowles Foundation Discussion Papers
506, Cowles Foundation for Research in Economics, Yale University.
- Davidson, Paul, 1997. "Are Grains of Sand in the Wheels of International Finance Sufficient to Do the Job When Boulders Are Often Required?," Economic Journal, Royal Economic Society, vol. 107(442), pages 671-86, May.
- Olivier Jeanne & Andrew K. Rose, 1999.
"Noise Trading and Exchange Rate Regimes,"
NBER Working Papers
7104, National Bureau of Economic Research, Inc.
- Jeanne, Olivier & Rose, Andrew K, 1999. "Noise Trading and Exchange Rate Regimes," CEPR Discussion Papers 2142, C.E.P.R. Discussion Papers.
- Olivier Jeanne & Andrew K Rose, 1999. "Noise trading and exchange rate regimes," Reserve Bank of New Zealand Discussion Paper Series G99/2, Reserve Bank of New Zealand.
- Bruno Bosco & Alessandro Santoro, 2004. "The Tobin Tax: A Mean-Variance Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 446-, September.
- Gabriele Galati, 2000. "Trading volumes, volatility and spreads in foreign exchange markets: evidence from emerging market countries," BIS Working Papers 93, Bank for International Settlements.
- Barry Eichengreen, James Tobin, and Charles Wyplosz., 1994.
"Two Cases for Sand in the Wheels of International Finance,"
Center for International and Development Economics Research (CIDER) Working Papers
C94-045, University of California at Berkeley.
- Eichengreen, Barry & Tobin, James & Wyplosz, Charles, 1995. "Two Cases for Sand in the Wheels of International Finance," Economic Journal, Royal Economic Society, vol. 105(428), pages 162-72, January.
- Thomas Palley, 1999. "Speculation and Tobin taxes: Why sand in the wheels can increase economic efficiency," Journal of Economics, Springer, vol. 69(2), pages 113-126, June.
- Bauer, Christian & Herz, Bernhard, 2005. "Technical trading, monetary policy, and exchange rate regimes," Global Finance Journal, Elsevier, vol. 15(3), pages 281-302, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John P. Conley).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.