Is a transactions tax an effective means to stabilize the foreign exchange market?
AbstractThe desirability of a transactions tax in the foreign exchange market, or Tobin tax, 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 InfoPaper provided by University of Bergamo, Department of Economics in its series Working Papers with number 0303.
Length: 18 pages
Date of creation: 2003
Date of revision:
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F3-International Finance; G1-General Financial Markets;
Other versions of this item:
- Andrea Terzi, 2003. "Is a transactions tax an effective means to stabilize the foreign exchange market?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 56(227), pages 367-385.
- Andrea Terzi, 2003. "Is a transactions tax an effective means to stabilize the foreign exchange market?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 56(227), pages 367-385.
- Andrea Terzi, 2004. "Is a transactions tax an effective means to stabilize the foreign exchange market?," International Finance 0403007, EconWPA.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
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