New Evidence from Assessing the Tobin Tax Effects on Exchange Stability and Trade

Abstract

The paper attempted to find out the economic effects of setting up a tax on currency transactions. Professor James Tobin was the first to propose the particular taxation to reduce the exchange volatility. Many authors interested by the Tobin tax topic, raised many statements against implementing such tax, they argued that it should tend to raise the fluctuations of exchanges rates, and in return, finish by harming the international trade. In the empirical investigation of the paper, we carried out an econometric modeling focused on data about exchange rate volatility, international trade. To explore the effects of the Tobin tax on exchange volatility and international trade, we calculated the currency transactions costs according to a new methodology, covering the period 1990 – 2011, and finding out the effects of the taxation on the exchange market of these countries: United Kingdom, Japan and Germany. The empirical investigation underlines two major findings, which allow us to reinforce establishing the tax on currency transactions, proposed by Professor James Tobin. The model puts emphasis on the decreasing effect of the Tobin tax on exchange volatility, it enabled us to infer that the currency taxation is contributing to improve the exchange rates stability. According to the estimation findings, the currency tax has positive impact on foreign trade, this evidence authorized us to denote that the Tobin tax tends to promote international trade transactions.