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The economic consequences of a Tobin tax - An experimental analysis

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Author Info
Michael Hanke ()
Jürgen Huber ()
Michael Kirchler ()
Matthias Sutter ()

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Abstract

The effects of a Tobin tax on foreign exchange markets have long been disputed. We present an experiment with currency trading on two markets, where either none, one, or both markets are taxed. Our results confirm the hitherto undisputed issues: a tax reduces trading volume, shifts market share to untaxed markets, and leads to negligible tax revenues if tax havens exist. Concerning the controversial issues we find that (i) volatility effects depend on the existence of tax havens and on market size, (ii) market efficiency remains unaffected by the tax, (iii) short-term speculation is reduced, and (iv) the tax has persistent effects even after its abolishment.

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Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2007-18.

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Length: 54
Date of creation: Aug 2007
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Handle: RePEc:inn:wpaper:2007-18

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Related research
Keywords: Tobin tax; Experiment; Foreign exchange; Market efficiency; Trading volume; Volatility;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct. [Downloadable!]
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  2. Eichengreen, Barry & Tobin, James & Wyplosz, Charles, 1995. "Two Cases for Sand in the Wheels of International Finance," Economic Journal, Royal Economic Society, vol. 105(428), pages 162-72, January. [Downloadable!] (restricted)
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  3. Frank Westerhoff, 2003. "Heterogeneous traders and the Tobin tax," Journal of Evolutionary Economics, Springer, vol. 13(1), pages 53-70, 02. [Downloadable!] (restricted)
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  4. Harald Hau, 2006. "The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse," Journal of the European Economic Association, MIT Press, vol. 4(4), pages 862-890, 06. [Downloadable!] (restricted)
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  5. Westerhoff, Frank H. & Dieci, Roberto, 2006. "The effectiveness of Keynes-Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 293-322, February. [Downloadable!] (restricted)
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  6. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  7. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
  8. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
  9. Paul H. Kupiec, 1995. "A Securities Transactions Tax And Capital Market Efficiency," Contemporary Economic Policy, Western Economic Association International, vol. 13(1), pages 101-112, 01. [Downloadable!] (restricted)
  10. Kenen, Peter B, 1995. "Capital Controls, the EMS and EMU," Economic Journal, Royal Economic Society, vol. 105(428), pages 181-92, January. [Downloadable!] (restricted)
  11. Gudrun Ehrenstein, 2002. "Cont-Bouchaud percolation model including Tobin tax," Quantitative Finance Papers cond-mat/0205320, arXiv.org. [Downloadable!]
  12. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Harald Oberhofer & Michael Pfaffermayr, . "FDI versus Exports. Substitutes or Complements? A Three Nation Model and Empirical Evidence," Working Papers 2007-28, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
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  2. Jesus Crespo Cuaresma & Andreas Breitenfellner, . "Crude Oil Prices and the Euro-Dollar Exchange Rate: A Forecasting Exercise," Working Papers 2008-08, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  3. Andrea M. Leiter & Gerald J. Pruckner, . "Proportionality of willingness to pay to small changes in risk - The impact of attitudinal factors in scope tests," Working Papers 2007-30, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
    Other versions:
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