Monetary Policy and Tobin Taxes: A Welfare Analysis

This paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic aThis paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic and foreign goods.