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On central bank interventions and transaction taxes

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  • Frank H. Westerhoff

Abstract

We show that carefully designed central bank interventions may have a similar (stabilizing) effect on foreign exchange dynamics as transaction taxes. Transaction taxes seek to curb speculative activity. If speculators consist of chartists and fundamentalists  --  as indicated by many empirical studies  --  central banks may seek to replicate the impact of transaction taxes by countering the orders of these traders. This would simultaneously require trading against the current exchange rate trend and, surprisingly, slowing down the convergence of the exchange rate towards its fundamental value.

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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

Volume (Year): 3 (2007)
Issue (Month): 1 (January)
Pages: 11-14

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Handle: RePEc:taf:apfelt:v:3:y:2007:i:1:p:11-14

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  1. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
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  5. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
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  8. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  9. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
  10. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
  11. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
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