The Impact of the Tobin Tax in a Heterogeneous Agent Model of the Foreign Exchange Market

Jiri Kukacka and Filip Stanek
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Filip Stanek: Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic

No 2015/26, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: We explore possible effects of a Tobin tax on exchange rate dynamics in a heterogeneous agent model. To assess the impact of the Tobin tax in this framework, we extend the model of De Grauwe and Grimaldi (2006) by including transaction costs and perform numerical simulations. Motivated by the importance of the market microstructure, we choose to model the market as being cleared by a Walrasian auctioneer. This setting could more closely resemble the two-layered structure of foreign exchanges at daily frequency than a price impact function, which is often adopted in similar studies. We find that the Tobin tax can deliver a moderate reduction of return volatility and kurtosis. In addition, simulations indicate that the Tobin tax reduces the degree of mispricing in the time series, which is primarily achieved by eliminating long-lasting deviations from the fundamental value.

Keywords: Tobin Tax; Foreign Exchange Market; Agent Based Modeling; Walrasian Auctioneer (search for similar items in EconPapers)
JEL-codes: C63 D84 F31 G18 (search for similar items in EconPapers)
Pages: 26pages
Date: 2015-11, Revised 2015-11
New Economics Papers: this item is included in nep-opm and nep-pbe
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Journal Article: The Impact of the Tobin Tax in a Heterogeneous Agent Model of the Foreign Exchange Market (2018)
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