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This guide to coping with financial volatility should be of interest to academics and economists with interest in finance and international development.
In his 1972 Janeway Lectures at Princeton, James Tobin, the 1981 Nobel Prize winner for economics, submitted a proposal for a levy on international currency transactions. The idea was not greeted with enthusiasm, as the 1970s were a period of optimism and confidence in floating exchange rages. Yet, whenever currency crises erupted during the past decades, the proposal for a levy on international currency transactions would once again arise. In the 1990s, two additional facts have sharpened interest in the Tobin tax proposal. First is the growing volume of foreign exchange trading. Second, interest is coming not only from policymakers and experts concerned with the smooth functioning of financial markets. It is shared by those concerned with public financing of development--the fiscal crisis of the state as well as the growing need for international cooperation on problems such as the environment, poverty, peace and security. This work makes a systematic analysis of the proposal for a foreign exchange transactions levy. Its chapters examine the economic desirability of such a levy, its technical and political feasibility, its revenue potential, the possible uses of that revenue, and related administrative and institutional aspects.
Financial transactions taxes have recently gained attention as a possible means to influence the behavior of financial markets and to reduce destabilizing capital flows. One variation is a tax on all foreign currency conversions, often termed a “Tobin tax.” This paper suggests that these taxes would probably not produce the desired effects and would be difficult to design and implement. It is unclear that the possible advantages in reducing some short-term speculative trading would outweigh the possible disadvantages in impairing the efficiency of financial markets. From an administrative perspective, without a broad international consensus and application, these taxes are likely to be easily avoided.
In Good Taxes, Alex Michalos puts forth an argument in favour of a financial transactions tax.
Propounded by James Tobin in the 1970s, the Tobin tax would have levied a small amount from all currency transactions globally. This would have the effect of moderating speculation. It didn't take off but the author believes there is a way to make it work.
This paper clarifies why a transaction tax of the type proposed by James Tobin can have a stabilizing influence in financial markets. It argues that such a tax is potentially stabilizing, not because it reduces the "excessive" volume of transactions, but because it can slow the speed with which market traders react to price changes. To the extent that a Tobin tax causes financial market traders to delay their decisions a few "grains of sand in the wheels of international finance" can indeed be stabilizing. Whether that is sufficient, or whether boulders - not just grains - are needed to prevent speculative attacks on currencies, is, however, a different matter.