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Noise traders, exchange rate disconnect puzzle, and the Tobin tax

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  • Xu, Juanyi

Abstract

This paper proposes a framework to explain the "exchange rate disconnect puzzle". Two types of foreign exchange traders, rational traders and noise traders are introduced into a sticky-price general-equilibrium model. The presence of noise traders creates deviations from the uncovered interest parity. Combined with local currency pricing and consumption-smoothing behavior, our model can help to explain the "disconnect puzzle". The excess exchange rate volatility caused by noise traders can be reduced by the 'Tobin tax'. However, the effect of the 'Tobin tax' depends on the market structure and the interaction between the Tobin tax and other trading costs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 2 (March)
Pages: 336-357

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:2:p:336-357

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Noise traders Microstructure Exchange rate disconnect Macroeconomic fundamentals Volatility;

References

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Cited by:
  1. Rieger, Jörg, 2014. "Financial Transaction Tax and Financial Market Stability with Diverse Beliefs," Working Papers 0563, University of Heidelberg, Department of Economics.
  2. Thornton Matheson, 2012. "Security transaction taxes: issues and evidence," International Tax and Public Finance, Springer, vol. 19(6), pages 884-912, December.
  3. Lendvai, Julia & Raciborski, Rafal & Vogel, Lukas, 2013. "Macroeconomic effects of an equity transaction tax in a general-equilibrium model," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 466-482.

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