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Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework

Olivier Damette and Beum Jo Park ()

Review of International Economics, 2015, vol. 23, issue 5, 996-1022

Abstract: From an original data set on the euro–dollar and on the won–dollar currency pairs (2008–2010), we conduct a threshold quantile autoregressive model to explain the role of a Tobin tax (TT) on the exchange rate volatility, taking into account two types of nonlinearity (regimes and quantiles). We find evidence that the impact of a TT would not be monotonic. A TT may be a good instrument to stabilize foreign exchange volatility only in normal times and/or in efficient markets. In contrast, a TT could be counterproductive in turbulent periods by increasing the volatility. In addition, by comparing a major currency pair (euro/dollar) and a minor currency pair (won/dollar), it appears that the potential stabilizing effect of a TT would be more clear-cut in the low volatility regime of a major currency pair, similar to the euro/dollar. Our results do not corroborate the previous studies that derived a monotonic and positive impact of a TT on volatility.

Date: 2015
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