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The economic consequences of a Tobin tax - An experimental analysis

  • Michael Hanke

    ()

  • J?rgen Huber

    ()

  • Michael Kirchler

    ()

  • Matthias Sutter

    ()

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
Date of revision:
Handle: RePEc:inn:wpaper:2007-18
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  7. Eichengreen, Barry & Tobin, James & Wyplosz, Charles, 1994. "Two Cases for Sand in the Wheels of International Finance," Center for International and Development Economics Research (CIDER) Working Papers 233396, University of California-Berkeley, Department of Economics.
  8. 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.
  9. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
  10. Robert Z. Aliber & Bhagwan Chowdhry & Shu Yan, 2003. "Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility," Review of Finance, Springer, vol. 7(3), pages 481-510.
  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.
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  16. Ingrid M. Werner, 2003. "Comment on `Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility'," Review of Finance, Springer, vol. 7(3), pages 511-514.
  17. Jeffrey Frankel., 1995. "How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?," Center for International and Development Economics Research (CIDER) Working Papers C95-058, University of California at Berkeley.
  18. Kenen, Peter B, 1995. "Capital Controls, the EMS and EMU," Economic Journal, Royal Economic Society, vol. 105(428), pages 181-92, January.
  19. Ingrid M. Werner, 2003. "Comment on ‘Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility’," Review of Finance, European Finance Association, vol. 7(3), pages 511-514.
  20. Hau, Harald, 2002. "The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse," CEPR Discussion Papers 3651, C.E.P.R. Discussion Papers.
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  22. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  23. Umlauf, Steven R., 1993. "Transaction taxes and the behavior of the Swedish stock market," Journal of Financial Economics, Elsevier, vol. 33(2), pages 227-240, April.
  24. Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, vol. 87(4), pages 728-37, September.
  25. Subrahmanyam, Avanidhar, 1998. "Transaction Taxes and Financial Market Equilibrium," The Journal of Business, University of Chicago Press, vol. 71(1), pages 81-118, January.
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