Speculation and Tobin taxes: Why sand in the wheels can increase economic efficiency
The current paper develops the microeconomic case for a Tobin tax. It combines the noise-trader literature with the Tobin-tax-policy literature. Noise traders cause economic losses by inappropriately cashing out their investments. A Tobin tax can reduce such activity, thereby conferring a benefit on fundamentals investors. The paper identifies the conditions under which these gains would be largest and provides guidelines as to whether a tax is warranted. There is a trade-off because Tobin taxes discourage fundamentals investors from trading, and there are occasions when they would rationally choose to trade but do not because of the tax.
Keywordsnoise traders fundamentals investors speculation Tobin taxes
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