Is a transactions tax an effective means to stabilize the foreign exchange market?
DOI:
https://doi.org/10.13133/2037-3643/9819Keywords:
Foreign ExchangeAbstract
The desirability of a transactions tax in the foreign exchange market, or Tobin tax, depends on whether the tax deters short-term, destabilizing trade. While supporters claim that the tax would be a deterrent for short-term capital flows, critics contend that the deterrent capability of the tax would be limited. This paper attempts to resolve some lingering questions about the arithmetic of a transactions tax, and concludes that a tax would raise the required return from trade for any time horizon, and thus deter all trades driven by small expected capital gains (i.e., smaller than the square of one plus the tax rate), and not necessarily those driven by a short horizon of the investor. The paper then explores the consequences of this result on the effectiveness of the tax within competing paradigms and concludes that a Tobin tax is not likely to be an effective means to reach the declared objectives.
JEL Codes: F31, H87
References
DACOROGNA, M.M., R. GENAY, U.A. MOLLER, R.B. OLSEN and O.V. PICTET (2001), An Introduction to High-Frequency Finance, Academic Press, San Diego and London.
DAVIDSON, P. (1997), "Are grains of sand in the wheels of international finance sufficient to do the job when boulders are often required?", The Economic Journal, vol. 107, May, pp. 671-86.
DORNBUSCH, R. and J. FRANKEL (1987), "The flexible exchange rate system: experience and alternatives", NBER Working Paper, no. 2464, December.
EICHENGREEN, B., J. TOBIN and C. WYPLOSZ (1995), "Two cases for sand in the wheels of international finance", The Economic Journal, vol. 105, January, pp. 162-72.
FRANKEL, J. (1996), "How well do foreign exchange markets work: might a Tobin tax help?", in M. ul Haq, I. Kaul and I. Grunberg eds, The Tobin Tax. Coping with Financial Volatility, Oxford University Press, New York and Oxford, pp. 41-81.
GRAHL, J. and P. LYSANDROU (2003), "Sand in the wheels or spanner in the works? The Tobin tax and global finance", The Cambridge Journal of Economics, vol. 27, no. 4, pp. 597-621.
KENEN, P.B. (1995), "Capital controls, the EMS and EMU", The Economic Journal, vol. 105, January, pp. 181-92.
KEYNES, J.M. (1936), The General Theory of Employment, Interest, and Money, Macmillan, London.
PALLEY, T.I. (1999), "Speculation and Tobin taxes: why sand in the wheels can increase economic efficiency", Journal of Economics, vol. 69, no. 2, pp. 113-26.
SHILLER, R.J. (2000), Irrational Exuberance, Princeton University Press, Princeton.
TOBIN, J. (1978), "A proposal for international monetary reform", Eastern Economic Journal, vol. 4, July-October, pp. 153-59.
Downloads
Published
How to Cite
Issue
Section
License
