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A Note on the Tobin Tax

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  • Korkut Erturk

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    Abstract

    This paper clarifies why a transaction tax of the type proposed by James Tobin can have stabilizing influence in financial markets. It argues that such a tax is potentially stabilizing, not because it reduces the 'excessive' volume of transactions, but because it can slow the speed with which market traders react to price changes. To the extent that a Tobin tax causes financial market traders to delay their decisions a few "grains of sand in the wheels of international finance" can indeed be stabilizing. Whether or not that is sufficient to prevent speculative attacks on currencies is, however, a different matter.

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    Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2003_05.

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    Length: 14 pages
    Date of creation:
    Date of revision:
    Handle: RePEc:uta:papers:2003_05
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    Keywords: Transaction tax; speculation; finance;

    Find related papers by JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals

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    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
    2. Andrei Shleifer ad Robert W. Vishny, 1995. "The Limits of Arbitrage," Harvard Institute of Economic Research Working Papers 1725, Harvard - Institute of Economic Research.
    3. Robert W. Dimand & Mohammed H. I. Dore, 2000. "Keynes's Casino Capitalism, Bagehot's International Currency, and the Tobin Tax: Historical Notes on Preventing Currency Fires," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 22(4), pages 515-528, July.
    4. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May.
    5. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
    6. Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, edition 2, number 9780198282693.
    7. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    8. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    9. 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.
    10. 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.
    11. Arestis, Philip & Sawyer, Malcolm, 1997. "How Many Cheers for the Tobin Transactions Tax?," Cambridge Journal of Economics, Oxford University Press, vol. 21(6), pages 753-68, November.
    12. Davidson, Paul, 1997. "Are Grains of Sand in the Wheels of International Finance Sufficient to Do the Job When Boulders Are Often Required?," Economic Journal, Royal Economic Society, vol. 107(442), pages 671-86, May.
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