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On the Tobin Tax

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  • Korkut Erturk

Abstract

This paper clarifies why a transaction tax, such as the Tobin Tax, can stabilize financial markets. In markets that are already fairly deep, relatively small changes in trading volume are unlikely to have any impact (positive or negative) on volatility. Thus, a Tobin Tax can potentially have a stabilizing effect on international currency markets not because it reduces the excessive volume of transactions of speculators, but because it can slow down the speed with which market traders react to changes in prices of currencies. Moreover, it can lower their elasticity of future price expectations with respect to current price changes, which also has a stabilizing effect. Thus, to the extent that a Tobin Tax causes traders in financial markets to delay their decisions, a few 'grains of sand in the wheels of international finance' can indeed be stabilizing. Whether or not that is sufficient to prevent speculative attacks on currencies is a different matter.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 18 (2006)
Issue (Month): 1 ()
Pages: 71-78

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Handle: RePEc:taf:revpoe:v:18:y:2006:i:1:p:71-78

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Cited by:
  1. 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.
  2. Danuse Nerudova, 2011. "Taxing the financial sector in the European Union," MENDELU Working Papers in Business and Economics 2011-16, Mendel University in Brno, Faculty of Business and Economics.
  3. Mustafa Erdogdu & Hale Balseven, 2006. "How Effective is the Tobin Tax in Coping with Financial Volatility?," Anadolu University Journal of Social Sciences, Anadolu University, vol. 6(1), pages 107-128, June.
  4. Nissanke, Machiko, 2003. "Revenue Potential of the Currency Transaction Tax for Development Finance: A Critical Appraisal," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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