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How Well do Foreign Exchange Markets Function: Might a Tobin Tax Help?

  • Jeffrey A. Frankel

Figures for 1995 estimate trading by dealers in the foreign exchange market at over $1,200 billion per day, most of it with other dealers. Some have linked this volume to concerns of excessive volatility in the market. Tobin's proposal to address this volatility with a small tax on all foreign exchange transactions has not received the serious attention it deserves. The paper argues that a better case can be made for the proposition that the tax might dampen exchange rate volatility than most economists believe. Calculations show that the tax, unlike some forms of capital control, would fall far more heavily on short-term transactions than long-term. Survey data and a simple model suggest, in turn, that short-term activity can be destabilizing. The paper also offers crude estimates of the revenue that would be raised from the Tobin tax. It is left to other authors to examine a major shortcoming of the proposal, enforceability.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5422.

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Date of creation: Jan 1996
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Publication status: published as in the Tobin Tax: Coping with Financial Volatility, Mahbub Ul Haq, Inga Kaul and Isabelle Grunberg, eds. Oxford University, (with E. Stein and S.J. Wei), American Economic Review, 86, no.2, May 1996, pp.52-56.
Handle: RePEc:nbr:nberwo:5422
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  8. Campbell, John & Clarida, Richard, 1987. "The Dollar and Real Interest Rates," Scholarly Articles 3221495, Harvard University Department of Economics.
  9. Jeffrey A. Frankel & Kenneth A. Froot, 1986. "Short-term and long-term expectations of the yen/dollar exchange rate: evidence from survey data," International Finance Discussion Papers 292, Board of Governors of the Federal Reserve System (U.S.).
  10. Craig S. Hakkio, 1994. "Should we throw sand in the gears of financial markets?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 17-30.
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  13. Jeffrey A. Frankel & Shang-Jin Wei, 1998. "Regionalization of World Trade and Currencies: Economics and Politics," NBER Chapters, in: The Regionalization of the World Economy, pages 189-226 National Bureau of Economic Research, Inc.
  14. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc.
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  19. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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  24. Morris Goldstein, 1995. "Exchange Rate System and the IMF: A Modest Agenda, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa39.
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