Editing Tobin tax (section)

===Stability, volatility and speculation===

====The appeal of stability====
In 1972, Tobin examined the global monetary system that remained after the Bretton Woods monetary system was abandoned. This examination was subsequently revisited by other analysts, such as Ellen Frank, who, in 2002 wrote: "If by globalization we mean the determined efforts of international businesses to build markets and production networks that are truly global in scope, then the current monetary system is in many ways an endless headache whose costs are rapidly outstripping its benefits."<ref name="Frank">{{cite web|url=http://www.newint.org/issue342/surf.htm?amp;amp;utm_medium=email-html&amp;amp;utm_content=body&amp;amp;|title=Heavy surf & tsunamis|author=Ellen Frank|date=February 2002|publisher=[[New Internationalist magazine]]|access-date=23 February 2010}}{{Dead link|date=July 2018|bot=InternetArchiveBot|fix-attempted=no}}</ref> She continues with a view on how that monetary system stability is appealing to many players in the world economy, but is being undermined by [[Volatility (finance)|volatility]] and [[Exchange rate#Fluctuations in exchange rates|fluctuation in exchange rates]]: "Money scrambles around the globe in quest of the banker's holy grail – sound money of stable value – while undermining every attempt by cash-strapped governments to provide the very stability the wealthy crave."<ref name="Frank"/>

Frank then corroborates Tobin's comments on the problems this instability can create (e.g. high interest rates) for [[Developing country|developing countries]] such as Mexico (1994), countries in South East Asia (1997), and Russia (1998).<ref name="ex"/> She writes, "Governments of developing countries try to peg their currencies, only to have the peg undone by capital flight. They offer to [[United States dollar|dollarize]] or [[euro]]ize, only to find themselves so short of dollars that they are forced to cut off growth. They raise interest rates to extraordinary levels to protect investors against currency losses, only to topple their economies and the source of investor profits. ... IMF bailouts provide a brief respite for international investors but they are, even from the perspective of the wealthy, a short-term solution at best ... they leave countries with more debt and fewer options."<ref name="Frank" />

====Effect on volatility====
One of the main economic hypotheses raised in favor of financial transaction taxes is that such taxes reduce return [[volatility (finance)|volatility]], leading to an increase of long-term investor [[utility]] or more predictable levels of exchange rates. The impact of such a tax on volatility is of particular concern because the main justification given for this tax by Tobin was to improve the autonomy of macroeconomic policy by curbing international currency speculation and its destabilizing effect on national exchange rates.<ref name = "Tobin"/>

=====Theoretical models=====
Most studies of the likely impact of the Tobin tax on financial markets volatility have been ''theoretical''—researches conducted laboratory simulations or constructed economic models. Some of these theoretical studies have concluded that a transaction tax could reduce volatility by crowding out speculators<ref>{{Cite journal|last=Westerhoff|first=F.|year=2003|title=Heterogeneous traders and the Tobin Tax|journal=Journal of Evolutionary Economics|volume=13|issue=1|pages=53–70|doi=10.1007/s00191-003-0140-5|s2cid=38621536}}</ref> or eliminating individual '[[Noise (economic)|noise]] traders'<ref>{{Cite journal|last=Palley|first=T.|year=1999|title=Speculation and Tobin Tax: why sand in the wheels can increase economic efficiency|journal=Journal of Economics|volume=69|issue=2|pages=113–126|citeseerx=10.1.1.588.3440|doi=10.1007/BF01232416|s2cid=16185048}}</ref> but that it 'would not have any impact on volatility in case of sufficiently deep global markets such as those in major currency pairs,<ref name="Erturk">{{Cite journal|last=Erturk|first=Korkut|year=2006|title=On the Tobin Tax|journal=Review of Political Economy|volume=18|issue=1|pages=71–78|doi=10.1080/09538250500354173|s2cid=153740324}}</ref> unlike in case of less liquid markets, such as those in stocks and (especially) options, where volatility would probably increase with reduced volumes.<ref>{{Cite journal|last=Davidson|first=P.|year=1997|title=Are grains of sand in the wheels of international finance sufficient to do the job when boulders are often required?|journal=Economic Journal|volume=107|issue=442|pages=671–686|doi=10.1111/1468-0297.00183|jstor=2957792}}</ref><ref>{{Cite journal|last=Davidson|first=P.|year=1998|title=Efficiency and fragile speculative financial markets: against the Tobin Tax and for a creditable market maker|journal=American Journal of Economics and Sociology|volume=57|issue=4|pages=639–666|doi=10.1111/j.1536-7150.1998.tb03383.x}}</ref> [[Behavioral finance]] theoretical models, such as those developed by Wei and Kim (1997)<ref>{{cite journal|author1=Shang-Jin Wei|author2=Jungshik Kim|name-list-style=amp|date=March 1999|title=The Big Players in the Foreign Exchange Market: Do They Trade on Information or Noise?|journal=Cid Working Papers |url=https://ideas.repec.org/p/wop/cidhav/5.html|publisher=Center for International Development at [[Harvard University]] in its series CID Working Papers with number 5.|access-date=2010-01-02|archive-url=https://web.archive.org/web/20090804105448/http://ideas.repec.org/p/wop/cidhav/5.html|archive-date=2009-08-04|url-status=live}}</ref> or Westerhoff and Dieci (2006)<ref>{{cite journal|last1=Westerhoff|first1=F|last2=Dieci|first2=R|year=2006|title=The effectiveness of Keynes–Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach☆|url=https://ideas.repec.org/a/eee/dyncon/v30y2006i2p293-322.html|journal=Journal of Economic Dynamics and Control|volume=30|issue=2|page=293|doi=10.1016/j.jedc.2004.12.004|access-date=2010-01-02|archive-url=https://web.archive.org/web/20090308013927/http://ideas.repec.org/a/eee/dyncon/v30y2006i2p293-322.html|archive-date=2009-03-08|url-status=live}}</ref> suggest that transaction taxes can reduce volatility, at least in the foreign exchange market. In contrast, some papers find a positive effect of a transaction tax on market volatility.<ref name="Kerbl2011">Kerbl S (2011) [http://www.oenb.at/Publikationen/Volkswirtschaft/Working-Papers/2011/Working-Paper-174.html "Regulatory Medicine Against Financial Market Instability: What Helps And What Hurts?"] {{Webarchive|url=https://web.archive.org/web/20150709165645/http://www.oenb.at/Publikationen/Volkswirtschaft/Working-Papers/2011/Working-Paper-174.html |date=2015-07-09 }} ''OeNB Working Paper''.</ref><ref name="Mannaro2008">Mannaro K, Marchesi M and Setzu A (2008) "Using an artificial financial market for assessing the impact of tobin-like transaction taxes." ''Journal of Economic Behavior & Organization'','''67(2)'''::445-462.</ref> Lanne and Vesala (2006) argue that a transaction tax "is likely to amplify, not dampen, volatility in foreign exchange markets", because such tax penalises informed market participants disproportionately more than uninformed ones, leading to volatility increases.<ref>{{Cite journal|last1=Lanne|first1=Markku|last2=Vesala|first2=Timo|title=The effect of a transaction tax on exchange rate volatility|journal=International Journal of Finance & Economics|date=2010 |volume=15 |issue=2 |pages=123–133|doi=10.1002/ijfe.399|ssrn=1018363|hdl=1814/3993|hdl-access=free}}</ref>

=====Empirical studies=====
{{See also|#Tobin tax proponents response to empirical evidence on volatility}}

In most of the available ''empirical'' studies however, no statistically significant causal link has been found between an increase in [[transaction cost]]s (transaction taxes or government-controlled minimum brokerage commissions) and a reduction in volatility—in fact a frequent unintended consequence observed by 'early adopters' after the imposition of a financial transactions tax (see Werner, 2003)<ref>{{Cite journal|last=Werner|first=Ingrid M.|year=2003|title=Comment on 'Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility'|journal=European Finance Review|volume=7|issue=3|pages=511–514|citeseerx=10.1.1.459.5056|doi=10.1023/B:EUFI.0000022151.50261.40}}</ref> has been an ''increase in the volatility'' of stock market returns, usually coinciding with significant declines in liquidity (market volume) and thus in taxable revenue (Umlauf, 1993).<ref name="Umlauf, Steven R. 1993">{{Cite journal|last=Umlauf|first=Steven R.|year=1993|title=Transaction taxes and the behavior or the Swedish stock market|journal=Journal of Financial Economics|volume=33|issue=2|pages=227–240|doi=10.1016/0304-405X(93)90005-V}}</ref>

For a recent evidence to the contrary, see, e.g., Liu and Zhu (2009),<ref name="Liu 2009">{{Cite journal|last1=Liu|first1=Shinhua|last2=Zhu|first2=Zhen|name-list-style=amp|year=2009|title=Transaction Costs and Price Volatility: New Evidence from the Tokyo Stock Exchange|journal=Journal of Financial Services Research|volume=36|issue=1|pages=65–83|doi=10.1007/s10693-009-0063-x|s2cid=154120891}}</ref> which may be affected by [[selection bias]] given that their Japanese sample is subsumed by a research conducted in 14 Asian countries by Hu (1998),<ref>{{Cite journal|last=Hu|first=Shing-yang|year=1998|title=The effects of the stock transaction tax on the stock market: Experiences from Asian markets|journal=Pacific-Basin Finance Journal|volume=6|issue=3–4|pages=347–364|doi=10.1016/S0927-538X(98)00017-1}}</ref> showing that "an increase in tax rate reduces the stock price but has no significant effect on market volatility". As Liu and Zhu (2009) point out, [...] the different experience in Japan highlights the comment made by Umlauf (1993) that it is hazardous to generalize limited evidence when debating important policy issues such as the STT [securities transaction tax] and brokerage commissions."