Comment on ‘Some Evidence that a Tobin Tax on Foreign Exchange Transactions may Increase Volatility’
Global turnover in foreign exchange markets averaged $1.2 trillion per day according to the most recent estimates available from the Bank for International Settlements. 1 Yet, cross-border trade of goods and services accounts for less than 5 percent of the total trading. While it is difficult to get precise estimates on hedging, roughly 20 percent of total trading is aimed at hedging against future exchange rate changes. The remaining roughly 75 percent of total turnover in global foreign exchange markets is believed to be related to short or long term exchange rate speculation. The large fraction of global turnover in currency markets that is unrelated to trade or hedging has lead economists and policy markets to the conjecture that speculation is responsible for the perceived recent increase in volatility in foreign exchange markets. Several economists, most prominently Nobel Laureate Dr. James Tobin, have advocated levying a tax (a "Tobin tax") on foreign exchange transactions to reduce volatility induced by exchange rate speculation. Recently, several European countries spearheaded by France have debated a proposed legislation to impose a tax on currency transactions. 2 However, to date, there is no strong empirical evidence that an increase in transactions costs (which would be the result of a Tobin tax) would significantly dampen volatility. On the contrary, This is the first piece of legislation in the world that would implement a Tobin-type tax. Belgium passed similar legislation in March, 2002, and several other European Union member countries have debated a Tobin tax. See www.currencytax.org.