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Is a transactions tax an effective means to stabilize the foreign exchange market?

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Author Info

  • Andrea Terzi

    (Franklin College Switzerland)

Abstract

The 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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File URL: http://128.118.178.162/eps/if/papers/0403/0403007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0403007.

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Length: 18 pages
Date of creation: 07 Mar 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0403007

Note: Type of Document - Acrobat PDF; to print on A4; pages: 18. 18 pages, pdf format in A4
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Web page: http://128.118.178.162

Related research

Keywords: Foreign Exchange; Global Finance; Tobin Tax.;

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References

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  1. Barry Eichengreen, James Tobin, and Charles Wyplosz., 1994. "Two Cases for Sand in the Wheels of International Finance," Center for International and Development Economics Research (CIDER) Working Papers C94-045, University of California at Berkeley.
  2. Kenen, Peter B, 1995. "Capital Controls, the EMS and EMU," Economic Journal, Royal Economic Society, vol. 105(428), pages 181-92, January.
  3. 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.
  4. Rudiger Dornbusch and Jeffrey Frankel., 1988. "The Flexible Exchange Rate System: Experience and Alternatives," Economics Working Papers 8868, University of California at Berkeley.
  5. Jeffrey A. Frankel, 1996. "How Well do Foreign Exchange Markets Function: Might a Tobin Tax Help?," NBER Working Papers 5422, National Bureau of Economic Research, Inc.
  6. 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.
  7. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  8. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
  9. John Grahl, 2003. "Sand in the wheels or spanner in the works? The Tobin tax and global finance," Cambridge Journal of Economics, Oxford University Press, vol. 27(4), pages 597-621, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Tobin Tax Monster
    by aterzi in Mecpoc on 2012-01-12 22:32:44

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