Capital control and exchange rate volatility |
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| Institution: | 1. National Taiwan University, Taiwan;2. National Dong Hwa University, Taiwan;1. De Nederlandsche Bank, PO Box 98, 1000 AB Amsterdam, Netherlands;2. Cass Business School, London, United Kingdom;1. Department of Mathematics and Research Institute of Natural Science, Gyeongsang National University, Jinju 660-701, Republic of Korea;2. Department of Mathematics and Statistics, York University, 4700 Keele St., Toronto, ON, Canada;1. Broad College of Business, Michigan State University, East Lansing, MI 48824, United States;2. College of Business Administration, University of Central Florida, Orlando, FL 32816, United States |
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| Abstract: | The study offers one conceptual and theoretical framework for evaluating the economic effects of a trading tax on foreign exchange transactions. Taxes and the price stickiness mechanism are taken into account in the model. When prices are flexible, full monetary neutrality can be obtained even in the short-term. Intuitively, taxes on foreign exchange transactions discourage speculation by rising currency trading costs, and, thus, increase the stability of the exchange rate. Finally, the results show that not only the exchange rate but consumption, investment and employment will become less volatile by imposing trading taxes on foreign exchange transactions. |
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| Keywords: | Capital control Exchange rate volatility Open economy macroeconomics Tobin tax |
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