Monetary Policy and Tobin Taxes: A Welfare Analysis

Chetan Subramanian and Jong Shin

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic aThis paper studies the choice of monetary policy regime in a small open economy underproductivity shocks and noise traders in forex markets. We focus on two simple rules: …xedexchange rates and in‡ation targeting. We contrast the above two rules against optimal policywith commitment. In general, the presence of noise traders increases the desirability of a …xedexchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital ‡ows. Thesetaxes help unambiguously in the absence of productivity shocks; their welfare impact underproductivity shocks depends on the monetary regime in place and the trade elasticity betweendomestic and foreign goods.

Keywords: Noise traders; Fixed exchange rates; Tobin taxes; Optimal monetary policy. (search for similar items in EconPapers)
JEL-codes: E E42 E52 F41 (search for similar items in EconPapers)
Date: 2014-03-08
New Economics Papers: this item is included in nep-mac, nep-mon and nep-opm
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Working Paper: Monetary policy and Tobin taxes: a welfare analysis (2014)
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