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

Andrea Terzi

International Finance from University Library of Munich, Germany

Abstract: 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.

Keywords: Foreign Exchange; Global Finance; Tobin Tax. (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ifn
Date: 2004-03-07
Note: Type of Document - Acrobat PDF; to print on A4; pages: 18. 18 pages, pdf format in A4
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Journal Article: Is a transactions tax an effective means to stabilize the foreign exchange market? (2003) Downloads
Journal Article: Is a transactions tax an effective means to stabilize the foreign exchange market? (2003) Downloads
Working Paper: Is a transactions tax an effective means to stabilize the foreign exchange market? (2003) Downloads
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