Is a transactions tax an effective means to stabilize the foreign exchange market?

Andrea Terzi

Banca Nazionale del Lavoro Quarterly Review, 2003, vol. 56, issue 227, 367-385

Abstract: The desirability of a transactions tax in the foreign exchange market, or Tobintax, 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.

Keywords: Foreign; Exchange (search for similar items in EconPapers)
JEL-codes: F31 H87 (search for similar items in EconPapers)
Date: 2003
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