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Is a transactions tax an effective means to stabilize the foreign exchange market?

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  • Andrea Terzi

    ()
    (Franklin College Switzerland, Area of Economics and Finance, Lugano (Switzerland) and Università Cattolica del Sacro Cuore, Istituto di Economia e Finanza, Milano (Italy))

Abstract

The desirability of a transactions tax in the foreign exchange market, or Tobintax, depends on whether the tax deters short-term, destabilizing trade. While supporters claim that the tax would be a deterrent for short-term capital flows, critics contend that the deterrent capability of the tax would be limited. This paper attempts to resolve some lingering questions about the arithmetic of a transactions tax, and concludes that a tax would raise the required return from trade for any time horizon, and thus deter all trades driven by small expected capital gains (i.e., smaller than the square of one plus the tax rate), and not necessarily those driven by a short horizon of the investor. The paper then explores the consequences of this result on the effectiveness of the tax within competing paradigms and concludes that a Tobin tax is not likely to be an effective means to reach the declared objectives.

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Bibliographic Info

Article provided by Banca Nazionale del Lavoro in its journal Banca Nazionale del Lavoro Quarterly Review.

Volume (Year): 56 (2003)
Issue (Month): 227 ()
Pages: 367-385

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Handle: RePEc:psl:bnlqrr:2003:43

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Keywords: Foreign Exchange;

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  1. Rudiger Dornbusch & Jeffrey A. Frankel, 1987. "The Flexible Exchange Rate System: Experience and Alternatives," NBER Working Papers 2464, National Bureau of Economic Research, Inc.
  2. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  3. 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.
  4. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
  5. John Grahl, 2003. "Sand in the wheels or spanner in the works? The Tobin tax and global finance," Cambridge Journal of Economics, Oxford University Press, vol. 27(4), pages 597-621, July.
  6. 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.
  7. Kenen, Peter B, 1995. "Capital Controls, the EMS and EMU," Economic Journal, Royal Economic Society, vol. 105(428), pages 181-92, January.
  8. 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.
  9. 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.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Tobin Tax Monster
    by aterzi in Mecpoc on 2012-01-12 22:32:44

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