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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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  1. 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.
  2. G. Ehrenstein & F. Westerhoff & D. Stauffer, 2003. "Tobin tax and market depth," Papers cond-mat/0311581, arXiv.org.
  3. Gudrun Ehrenstein, 2002. "Cont-Bouchaud percolation model including Tobin tax," Papers cond-mat/0205320, arXiv.org.
  4. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
  5. Kenen, Peter B, 1995. "Capital Controls, the EMS and EMU," Economic Journal, Royal Economic Society, vol. 105(428), pages 181-92, January.
  6. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," The Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January.
  7. Frank Westerhoff, 2002. "Heterogeneous Traders and the Tobin Tax," Computing in Economics and Finance 2002 51, Society for Computational Economics.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  13. 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.
  14. 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.
  15. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  16. 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.
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