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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. 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. 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.
  3. 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.
  4. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
  5. 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.
  6. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
  7. G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005. "Tobin tax and market depth," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 213-218.
  8. Kenen, Peter B, 1995. "Capital Controls, the EMS and EMU," Economic Journal, Royal Economic Society, vol. 105(428), pages 181-92, January.
  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. Dow, James & Rahi, Rohit, 2000. "Should Speculators Be Taxed?," The Journal of Business, University of Chicago Press, vol. 73(1), pages 89-107, January.
  11. Gudrun Ehrenstein, 2002. "Cont-Bouchaud percolation model including Tobin tax," Papers cond-mat/0205320, arXiv.org.
  12. Frank Westerhoff, 2003. "Heterogeneous traders and the Tobin tax," Journal of Evolutionary Economics, Springer, vol. 13(1), pages 53-70, 02.
  13. 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.
  14. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
  15. 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.
  16. 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.
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