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A Note on the Tobin Tax

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  • Korkut Erturk

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    Abstract

    This paper clarifies why a transaction tax of the type proposed by James Tobin can have stabilizing influence in financial markets. It argues that such a tax is potentially stabilizing, not because it reduces the 'excessive' volume of transactions, but because it can slow the speed with which market traders react to price changes. To the extent that a Tobin tax causes financial market traders 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, however, a different matter.

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    Bibliographic Info

    Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2003_05.

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    Length: 14 pages
    Date of creation:
    Date of revision:
    Handle: RePEc:uta:papers:2003_05

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    Keywords: Transaction tax; speculation; finance;

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    1. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
    2. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
    3. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
    4. Robert W. Dimand & Mohammed H. I. Dore, 2000. "Keynes's Casino Capitalism, Bagehot's International Currency, and the Tobin Tax: Historical Notes on Preventing Currency Fires," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(4), pages 515-528, July.
    5. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    6. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    7. 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.
    8. Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, edition 2, number 9780198282693.
    9. 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.
    10. Arestis, Philip & Sawyer, Malcolm, 1997. "How Many Cheers for the Tobin Transactions Tax?," Cambridge Journal of Economics, Oxford University Press, vol. 21(6), pages 753-68, November.
    11. 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.
    12. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
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