DOCSLIB.ORG

World Bank Document

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
World Bank Document WPS 2-2 7 POLICY RESEARCH WORKING PAPER 2267 Public Disclosure Authorized Do High Interest Rates No - there is no systematic associationbetween interest Defend Currencies during ratesand the outcome of SpeculativeAttacks? speculativeattacks. Public Disclosure Authorized Aart Kraay Public Disclosure Authorized Public Disclosure Authorized The World Bank Development Research Group Macroeconomicsand Growth U January 2000 a tPQmI.CY RESEARCH WORKING PAPER 2267 Summary findings Drawing on evidence from a large sample of speculative The lack of clear empirical evidence on the effects of attacks in industrial and developing countries, Kraay high interest rates during speculative attacks mirrors the argues that high interest rates do not defend currencies theoretical anmbiguitieson this issue. against speculative attacks. In fact, there is a striking lack of any systematic association between interest rates and the outcome of speculative attacks. This paper - a product of Macroeconomics and Growth, Develcpment Research Group - is part of a larger effort in the group to study the causes and consequences of financial crises. Copies of the paper are available free from the World Bank, 1818 H Street,N'W, Washington, DC 20433. Please contact Rina Bonfield, room MC3-354, telephone 202-473-1248, fax 202-522-3518, email address [email protected]. Policy Research Working Papers are also posted on the Web a!t www.worldbank.org/research/workingpapers. The author may be contacted at akraay@<iworldbank.org.January 200(0. (45 pages) The Policy Research Working Paper Series dissemninatesthe findings of work in progress to encourage the exchange of ideas about | development issues. An objective of the series is to get the findings out quickiy, even if the presentations ar-eless than f7lly polished. Th2e papers carry the names of the authors and should be cited accordingly. The findings, interpretations, aisd conclusions expressed in this paper are entirely those of the authors. They do uot necessa-ily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center Do High Interest Rates Defend Currencies During Speculative Attacks? Aart Kraay The World Bank 1818H Street, N.W. Washington,DC 20433, (202)473-5756, [email protected]. The opinionsexpressed in this paperare the author's,and do not reflectthose of the World Bank, its executivedirectors, or the countriesthey represent. I would liketo thank Alan Drazen,Ilan Goldfajn,Patrick Honohan, Vickie Kraay, MariaSoledad MartinezPeria, Sergio Schmukler, Jakob Svensson, Jaume Ventura and seminar participantsat MIT, the TinbergenInstitute, and the World Bankfor helpfulcomments. 1. Introduction Accordingto conventionalwisdom, currencies that comeunder speculative attack can be defendedwith high interestrates. By raising interestrates high enough, the conventionalwisdom argues that the monetaryauthority can make it prohibitively costlyfor speculatorsto take short positionsin the currencyunder attack. High interest rates are often alsosaid to conveya positivesignal regardingthe commitmentof the monetaryauthority to maintaininga fixed exchangerate. To the extentthat this signal alters the expectationsof foreign exchangemarket participants,high interestrates can serve to strengthenthe domesticcurrency. A classicexample in supportof the conventionalwisdom is the responseto the attackon the Swedishkrona in the summer of 1992,shown in the top panelof Figure 1. BetweenJuly and August,speculative pressuresagainst the krona resultedin a loss of nearlyone-quarter of the reservesof the Swedishcentral bank. To stemthe outflow,the centralbank's marginal lending rate was raisedto an incredible500 percenton September17 and 18, and hoveredin the vicinity of 50 percentfor the nextweek. Reservelosses were promptlyhalted, and the krona'speg was maintained. Recently,a contrarianview of the effects of high interestrates duringspeculative attackshas emerged,which calls into questionboth tenets of the conventionalwisdom. First, it notesthat interestrates haveto be increasedto very high annualizedrates in order to enticeeven risk-neutralinvestors to hold local currency-denominatedassets in the face of a small expecteddevaluation over a short horizon,and suchextremely high interestrates are rarely observedin practice.' Second,this view notesthat the signaling value of high interestrates is unclear. Althoughsignals must be costly in orderto be credible,often they imposecosts that are too high for the monetaryauthority to take in stride. If marketparticipants know that the monetaryauthority is concernedabout the contractionaryeffects of high interestrates on domesticeconomic activity, they are unlikelyto believethat rates will be kept high enough,and for long enough,to deter speculation.Worse, as the costsof high interestrates mount,the monetaryauthority's signalcan becomeless credibleover time, raisingdevaluation expectations. A vicious 1For example,a risk-neutralinvestor expecting only a 0.5 percentovernight depreciation would requiie an overnightannualized rate of returnof 500 percenton domesticcurrency to compensatefor the expected devaluation. 1 spiral can result,as expectationsof a devaluationforce higher interestrates, which in turn imposegreater costs on the economy.2An exampleconsistent with this contrarian view of the effects of high interestrates is Koreain the secondhalf of 1997,shown in the lower panelof Figure 1. As the EastAsian financial crisis spread from Thailandand Malaysia,speculative pressures against the Koreanwon intensifiedand the reservesof the Koreancentral bank fell from 35 billionto 25 billion US dollars betweenJune and November.Although the overnightcall rate was raisedfrom around 12 percentin early Novemberto over 30 percentby the end of December,the won fell by over 50 percent duringthis period. In light of thesetheoretical ambiguities and conflictinganecdotes, this paper asks whetherthere is any systematicempirical evidence in supportof the conventional wisdomregarding the effects of high interestrates during speculativeattacks. To answerthis question,I study the behaviourof interestrates around a large numberof successfulspeculative attacks (i.e. attacksthat end in a sharp nominaldevaluations) andfailed speculativeattacks (i.e. attacksthat did not end in a devaluation)in a sample of 75 developedand developingcountries over the period 1960-1997. I examine whetherinterest rates rise duringfailed speculaltiveattacks (i.e. whetherraising interest rates is necessaryto preventa speculativeattack from endingin a devaluation),and whetherraising interest rates increasesthe probabilitythat an attack fails (i.e.whether raisinginterest rates is sufficientto preventa speculativeattack from endingin a devaluation). This empiricalexercise faces threedifficulties: measuring the policy responseto a speculativeattack, accountingfor possiblenon-linearities in the effectsof the policy response,and controllingfor the endogeneityof the policy response. First, it is difficult to disentanglethe monetarypolicy response to a given speculativeattack from other sourcesof variationin observedmarket interest rates duringthe attack. For example, increasesin marketinterest rates duringa speculativeattack might reflectboth a tighteningof domesticcredit by the monetaryaLuthority, and also an increasein the 2Drazen and Masson(1994) developa modelin whichsignals become less credibleover time. Bensaid and Jeanne(1997) formalize devaluation spirals. Radeletand Sachs(1998) and Furmanand Stiglitz (1998)discuss other reasonswhy tighter monetarypolicy can weaken,rather than strengthen,the currency underattack. 2 devaluationexpected by marketparticipants. In order to obtain a direct measureof the monetarypolicy responseto speculativepressures, I rely primarilyon changesin interestrates underthe controlof the monetaryauthority (i.e. centralbank discount rates) as a measureof policy. A drawbackof this measureis that discountrates are only one of many instrumentsthat the monetaryauthorities have at their disposalto resist speculativepressures. I thereforealso check the robustnessof the resultsusing a variety of other noisierindicators of the stance of monetarypolicy. Second,there may be importantnon-linearities in the effects of interestrates on speculativepressures, and ultimatelyon the outcomeof the attack. For example,the credibilityof the monetaryauthority's signal of its intentto defend the currencymay dependon the economy'sability to withstandthe contractionaryeffects of tight monetary policy,or on the quantityof reservesheld by the monetaryauthority. In this case, simplecorrelations between measures of monetarypolicy and the outcomeof speculativeattacks may obscureany effectsof policy presentonly in certain subsamplesof speculativeattacks. I take into accountthe possibilityof episode-specific variationin the effects of monetarypolicy by splittingthe samplealong various dimensions,and by interactingmeasures of monetarypolicy with episode-specific characteristics. 3 Third and perhapsmost important,the policy decisionsof the monetaryauthority are themselvesendogenous, and are likely to dependon both episode-specific characteristicsthat determinespeculative pressures, and on speculativepressures themselves.Consider an economythat is vulnerableto a speculativeattack, perhaps becauseits real exchangerate is overvaluedor its reservesare low relativeto its short- term obligations. If attackson vulnerablecurrencies are both more likelyto succeed,
Load more

Recommended publications
  • Currency Crises: a Perspective on Recent Theoretical Developments
    SPECIAL PAPERS IN INTERNATIONAL ECONOMICS No. 20, March 2000 CURRENCY CRISES: A PERSPECTIVE ON RECENT THEORETICAL DEVELOPMENTS OLIVIER JEANNE INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS PRINCETON UNIVERSITY PRINCETON, NEW JERSEY SPECIAL PAPERS IN INTERNATIONAL ECONOMICS SPECIAL PAPERS IN INTERNATIONAL ECONOMICS are published by the International Finance Section of the De- partment of Economics of Princeton University. Although the Section sponsors the publications, the authors are free to develop their topics as they wish. The Section welcomes the submission of manuscripts for publication in this and its other series. Please see the Notice to Contributors at the back of this Special Paper. The author of this Special Paper, Olivier Jeanne, is an economist at the Research Department of the International Monetary Fund. He has also served as a researcher at the Centre d’Enseignement et de Recherche en Analyse Socio- Économique (CERAS) in Paris and as a visiting assistant professor at the University of California at Berkeley. His interests include currency crises, monetary policy, and the economics of social status. GENE M. GROSSMAN, Acting Director International Finance Section SPECIAL PAPERS IN INTERNATIONAL ECONOMICS No. 20, March 2000 CURRENCY CRISES: A PERSPECTIVE ON RECENT THEORETICAL DEVELOPMENTS OLIVIER JEANNE INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS PRINCETON UNIVERSITY PRINCETON, NEW JERSEY INTERNATIONAL FINANCE SECTION EDITORIAL STAFF Gene M. Grossman Acting Director Margaret B. Riccardi, Editor Sharon B. Ernst, Editorial Aide Lalitha H. Chandra, Subscriptions and Orders Library of Congress Cataloging-in-Publication Data Jeanne, Olivier Currency crises : a perspective on recent theoretical developments / Olivier Jeanne. p. cm. — (Special papers in international economics ; no. 20) Includes bibliographical references.
    [Show full text]
  • ESTIMATION of SPECULATIVE ATTACK MODELS Use
    EESSTTIIMMAATTIIOONN OOFF SSPPEECCUULLAATTIIVVEE AATTTTAACCKK MMOODDEELLSS AANNDD TTHHEE IIMMPPLLIICCAATTIIOONNSS FFOORR MMAACCRROOEECCOONNOOMMIICC PPOOLLIICCYY:: JJaammaaiiccaa 11999911--0000 ABSTRACT This paper attempts to generate an empirical model aimed at predicting the timing and magnitude of currency depreciation forced by speculative attacks on Jamaica’s managed exchange rate system. The paper is grounded within a first generation approach (‘fundamentals approach’) to speculative attack modeling, which stresses the role played by weak economic fundamentals in inducing currency crises. While this approach has been applied exclusively to fixed and pegged exchange rate regimes, we believe that with some modification the empirical model can be applied to managed exchange rate systems. The estimation procedure generates an equilibrium exchange rate derived from a reduced form equation and the difference between the evolution of the actual exchange rate and the generated equilibrium rate is considered as the misalignment gap. The gap revealed the extent to which the market has persistently factored in an expected depreciation of the currency driven primarily by the inconsistency in fiscal and monetary policy as well as random shocks relating to the unavailability of external credit supplies and relative prices. The methodology is applied to the Jamaican dollar and the model is estimated using data from 1991 to 1999. The model generates time-series estimates of the twelve period-ahead (January to December 2000) probability of depreciation and the expected value of the new managed exchange rate. Bosede Nelson-Douglas* Research & Economic Programming Division January 2001 ---------------------- *The views expressed in this paper are those of the author and do not necessarily reflect the views of the Bank of Jamaica.
    [Show full text]
  • Explaining the September 1992 ERM Crisis: the Maastricht Bargain and Domestic Politics in Germany, France, and Britain
    Explaining the September 1992 ERM Crisis: The Maastricht Bargain and Domestic Politics in Germany, France, and Britain Explaining the September 1992 ERM Crisis: The Maastricht Bargain and Domestic Politics in Germany, France, and Britain Christina R. Sevilla Harvard University Dept. of Government Cambridge, MA 02138 [email protected] Presented at the European Community Studies Association, Fourth Biennial International Conference, May 11-14, 1995, Charleston, SC. Comments welcome. In September of 1992, the seemingly inexorable movement of the European exchange rate mechanism from a system of quasi-fixed exchange rates towards monetary union and ultimately a common currency by the end of the decade was abruptly preempted, perhaps indefinitely. Massive speculative pressure on the eve of the French referendum precipitated the worst crisis in the thirteen- year history of the European Monetary System, resulting in the ejection of the sterling and the lira from the ERM, the devaluation of the peseta, the threat of forced devaluation of several other currencies, including the "hard-core" franc, and the abandonment or near-abandonment of unilateral currency pegs to the system by non-ERM countries. Together with political recriminations and blame-laying between Britain and Germany in the aftermath, the crisis represented a tremendous blow to the goals of political and economic integration recently affirmed by EC member governments in the Maastricht Treaty on European Union in December 1991. Nevertheless, conventional wisdom at the time dictated a more sanguine assessment of the prospects for EMU, in the belief that the strains within the ERM were due to the unfortunate confluence of exceptional circumstances -- the shock of German reunification, a debt-driven recession in Britain, and the uncertainties caused by the Danish and French referendums on Maastricht.
    [Show full text]
  • Speculative Attacks Within Or Outside a Monetary Union: Default Versus Inflation (What to Do Today) Daniel Gros
    Speculative Attacks within or outside a Monetary Union: Default versus Inflation (what to do today) Daniel Gros No. 257, November 2011 Introduction The historical record shows that during the early 1990s Italy faced a much higher burden in terms Is a high level of public debt inherently more of high interest rates and interest expenditure dangerous within a monetary union? During the than today. Nevertheless the current position of 1990s it was often argued that only by entering Italy is perceived as even more dangerous than the EMU could Italy (or Spain) protect itself from then. the high interest rates it had to pay on its large public debt. The argument was that by joining The key question that remains at the analytical the single currency, Italy could convince level is thus whether there are other mechanisms financial markets that it would not inflate away that make a formal default with a haircut the value of its debt and hence benefit from different from debt monetization, which reduces lower risk premia. the purchasing power for investors by the same amount. This paper argues that there is indeed a Oddly enough, the opposite augment is often difference because a formal sovereign default used today to explain Italy’s current high risk invariably leads to a banking crisis. Moreover, premium: Italy (and Spain) has to pay a high risk within a monetary union a sovereign is more premium because it has lost the option to use the exposed to liquidity problems than a country printing press, so the argument goes today. with an independent currency and any of its Moreover, it has been argued that the higher problems quickly spill over into the banking interest burden could go beyond the willingness system, which cannot survive without a reliable of the population to pay taxes, thus pushing the source of liquidity given that banks are by nature country into default if interest rates stay too highly leveraged institutions.
    [Show full text]
  • Currency Crisis Models
    1 CURRENCY CRISIS MODELS Craig Burnside, Martin Eichenbaum, and Sergio Rebelo The New Palgrave: A Dictionary of Economics, 2nd Edition February 2007 There have been many currency crises during the post-war era (see Kaminsky and Reinhart, 1999). A currency crisis is an episode in which the exchange rate depreciates substantially during a short period of time. There is an extensive literature on the causes and consequences of a currency crisis in a country with a fixed or heavily managed exchange rate. The models in this literature are often categorized as first-, second- or third-generation. In first-generation models the collapse of a fixed exchange rate regime is caused by unsustainable fiscal policy. The classic first-generation models are those of Krugman (1979) and Flood and Garber (1984). These models are related to earlier work by Henderson and Salant (1978) on speculative attacks in the gold market. Important extensions of these early models incorporate consumer optimization and the government’s intertemporal budget constraint into the analysis (see Obstfeld, 1986; Calvo, 1987; Drazen and Helpman, 1987; Wijnbergen, 1991). Flood and Marion (1999) provide a detailed review of first-generation models. In a fixed exchange rate regime a government must fix the money supply in accordance with the fixed exchange rate. This requirement severely limits the government’s ability to raise seigniorage revenue. A hallmark of first-generation models is that the government runs a persistent primary deficit. This deficit implies that the government must either deplete assets, such as foreign reserves, or borrow to finance the deficit. It is infeasible for the government to borrow or deplete reserves indefinitely.
    [Show full text]
  • Interest Rate Defense Against Speculative Attack As a Signal. a Primer
    This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Managing Currency Crises in Emerging Markets Volume Author/Editor: Michael P. Dooley and Jeffrey A. Frankel, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-15540-4 Volume URL: http://www.nber.org/books/dool03-1 Conference Date: March 28-31, 2001 Publication Date: January 2003 Title: Interest Rate Defense against Speculative Attack as a Signal. A Primer Author: Allan Drazen URL: http://www.nber.org/chapters/c9646 2 Interest Rate Defense against Speculative Attack as a Signal A Primer Allan Drazen 2.1 Introduction In the light of recent currency crises, two key policy questions are how to defend a currency against attack and what the effects of different avenues of defense are. A commonly used defense is to raise short-term interest rates sharply to deter speculation. Interest rate defense has had both successes and failures, some quite spectacular. For example, Hong Kong raised overnight rates to several hundred percent and successfully defended its currency in October 1997 against speculative attack. On the other hand, Sweden similarly raised its interest rate by several hundred percent in its currency defense in September 1992, but the success was short-lived. These are but two examples. In many countries, raising very short-term rates to very high levels to defend the exchange rate appeared to have little effect in deterring speculation, whereas in others, moderate increases in the interest rate have seemed to dampen speculative pressures. In short, a first look at episodes leaves the question of the effectiveness of an interest rate defense very much open.
    [Show full text]
  • The Collapse of the Bretton Woods Fixed Exchange Rate System
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform Volume Author/Editor: Michael D. Bordo and Barry Eichengreen, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-06587-1 Volume URL: http://www.nber.org/books/bord93-1 Conference Date: October 3-6, 1991 Publication Date: January 1993 Chapter Title: The Collapse of the Bretton Woods Fixed Exchange Rate System Chapter Author: Peter M. Garber Chapter URL: http://www.nber.org/chapters/c6876 Chapter pages in book: (p. 461 - 494) 9 The Collapse of the Bretton Woods Fixed Exchange Rate System Peter M. Garber The collapse of the Bretton Woods system of fixed exchange rates was one of the most accurately and generally predicted of major economic events.’ Hind- sight, of course, sharpens the perception of the inevitability of events and makes great prophets of those members of the spectrum of analysts who hap- pened to get their predictions right. But the general outlines at least of the key events from 1967 through 1971 were foreseen, starting from the work of Trif- fin (1960), whose warnings provided the compass to policymakers imple- menting serious changes in the provision of liquidity and the administration of capital controls in a vain attempt to preserve the system. The heyday of Bretton Woods, during which the system actually operated as envisioned under full convertibility, lasted only from 1959 through 1968. Associated with steady growth in world production and trade, these nine years and the preceding decade of movement toward currency convertibility are considered something of a golden age in contrast to the six-year debacle of the interwar gold standard.
    [Show full text]
  • Capital Controls and 3Rd Generation Models of Speculative Attack
    Capital Movements: Curse or Blessing?* Michael P. Dooley and Carl E. Walsh Interest in capital controls has been a highly cyclical industry. As Tobin (1996) observed “The interest that occasionally arose (for his transactions tax proposal) came from journalists and financial pundits. It was usually triggered by currency crises and died out when the crisis passed from the headlines.” Financial crises have certainly been a frequent and painful feature of the international monetary system in recent years. The obvious welfare costs of crises have led to a general reevaluation of strategies for opening repressed financial systems to international competition. The limitations and fragility of private credit markets in developing countries should not have been a surprise. Financial markets in industrial countries are highly regulated and there is a very large and sophisticated literature on the market failures that make this regulation necessary. The primary objective for supervision and regulation in industrial countries remains the maintenance of financial stability. In this paper we note that the regulatory framework in industrial countries has evolved away from crude controls over insured banks' ability to compete for liabilities. Nevertheless, capital controls designed to limit insured residents ability to sell liabilities to nonresidents may be the best available prudential control in emerging markets today. * Prepared for “International Financial Markets: The Challenge of Globalization,” Texas A&M University March 31, 2000. 2 We argue below that controls over bank liabilities, such as regulation Q ceilings on deposit interest rates in the United States, were effective prudential controls when the United States was an "emerging market." Limitations on "capital inflows" to banks were designed to limit banks' ability to compete for deposits in order to exploit government provided deposit insurance.
    [Show full text]
  • Work Group on a Solidarity Socio-Economy – Alliance 21 Preparatory Meeting for Launching of the Workshop on International Regu
    Work Group on a Solidarity Socio-Economy – Alliance 21 Preparatory Meeting for Launching of the Workshop on International Regulations within the context of a Solidarity Socio-Economy in an era of Neo-liberal Globalization Tokyo October 9-11, 2003 Costs of currency speculation; the evolving Tobin Tax; the dynamics of today’s campaign David Hillman, Tobin Tax Network Coordinator (UK) Introduction My presentation is about the currency transaction tax (CTT) – the Tobin Tax. I will for the most part take a campaign perspective, although for a time take a more academic line referring to the very recent work of Japanese economist, Machiko Nissanke. My goal is to touch on the different aspects of the Tobin Tax: The various constituencies who have been affected by currency speculation How the Tobin Tax campaign is evolving and where the campaign can travel to now. I would like to emphasize from the start how potent the Tobin Tax issue is as a campaign vehicle and make clear its potential makes it is as relevant now as it has ever been. I believe my presentation will show that the Tobin Tax campaign is not tired or past its sell-by date (as some critics may want us to believe). It is, instead, very much on its way to maturity and may have a critical role to play in moving our wider ‘solidarity’ agenda forward. 1 Section 1: Costs of currency speculation (based on the ‘Costing the Casino’ report written by the UK charity, War on Want, available at: http://www.waronwant.org/?lid=1443). Firstly, let us remind ourselves where the Tobin Tax campaign came from by looking at who has been affected by the ‘Money Trade’ – the cost to people of currency speculation and volatility.
    [Show full text]
  • WIDER Discussion Paper 2003
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Nissanke, Machiko Working Paper Revenue potential of the currency transaction tax for development finance: A critical appraisal WIDER Discussion Paper, No. 2003/81 Provided in Cooperation with: United Nations University (UNU), World Institute for Development Economics Research (WIDER) Suggested Citation: Nissanke, Machiko (2003) : Revenue potential of the currency transaction tax for development finance: A critical appraisal, WIDER Discussion Paper, No. 2003/81, The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki This Version is available at: http://hdl.handle.net/10419/53109 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents
    [Show full text]
  • Debating the Tobin Tax
    Debating The Tobin Tax New Rules for Global Finance Published by New Rules for Global Finance Coalition Washington, DC November 2003 Copyright of Papers Belong to the Authors Editors James Weaver Randall Dodd Jamie Baker Conference Planning Committee Jamie Baker Renee Blanchard Peter Bakvis Randall Dodd Seamus Finn Ilene Grabel Jo Marie Griesgraber Didier Jacobs Thomas Palley Liane Schalatek James Weaver Emira Woods Cover Design George Mocharko Printed by Automated Graphic Systems, INC CONTENTS 1. Introduction 1 James Weaver 2. The Economic Case for the Tobin Tax 5 Thomas I. Palley 3. Lessons for Tobin Tax Advocates: The Politics of 27 Policy and the Economics of Market Micro-structure Randall Dodd 4. How Can a Currency Transaction Tax Stabilize 51 Foreign Exchange Markets? Bruno Jetin 5. Securities Transaction Taxes and Financial Markets 77 Karl Habermeier and Andrei Kirilenko 6. Currency Transactions Taxes: A Brief Assessment 93 of Opportunities and Limitations Ilene Grabel 7. Tobin Taxes: Are They Enforceable? 101 Dean Baker 8. Overcoming the Tobin Tax’s Implementation Problems: 109 Tax Cross-Border Capital Flows, Not Currency Exchanges Howell H. Zee 9. Applying a Securities Transactions Tax to the US: 119 Design Issues, Market Impact, Revenue Estimates Robert Pollin 10. Understanding the Silence Amid Turmoil: 135 The Tobin Tax and East Asia Young-Chul Kim 11. Where Do We Go From Here? 151 Jo Marie Griesgraber Appendix A. Primer on Tobin Taxes 157 B. Primer: Transactions Taxes, or the Tobin Tax 173 C. New Rules for Global Finance Coalition 183 1 INTRODUCTION James Weaver New Rules for Global Finance American University The late James Tobin, Sterling Professor of Economics at Yale, a Nobel Laureate, a great economist and great human being, proposed in the 1970s, after the breakdown of the fixed exchange rate system that a currency transactions tax be imposed in order to slow down speculative movements of currency and give governments greater ability to manage their own domestic monetary and fiscal policy.
    [Show full text]
  • The Gold Standard, Bretton Wood and Other Monetary Regimes
    123 Michael TI. Bordo Michael D. Bordo is a professor of economics at Rutgers University and a research associate of the National Bureau of Economic Research. For excellent research assistance I would like to thank Jakob Koenes. For helpful comments and suggestions I am grateful to Barn,’ Eichengreen, Allan Meltzer, Leslie Presnell, Hugh Rockoft and Anna Schwartz. • I The Gold Standard, Bretton Woods and Other Monetary Regimes: A Historical Appraisal INTRODUCTION to the presence of credible commitment mechan- isms, that is, to the incentive compatibility fea- Two Questions tures of the regime. Successful fixed-rate regimes, Which international monetary regmm is h ~5t in addition to being based on simple transparent for economic performance? One based on fixed rules, contained lea tures tim t enconraged a center exchange rates, including the gold standard and country to enforce the rules and other coun- its variants? Adjustable peg regimes such as the tries to comply. Brel ton Woods system and the European Mone- tarv System (EMS)? Or one based on floating The Issues exchange rates? This quest ion has been debated These questions touch on a number of impor- since Nurkse’s classic indictment of flexible rates tant issues raised in economic literature. ‘Ihe and Friedmans classic defense. first is the effect of the exchange rate regime Why have some none tarv regimes been more on welfare. The key advantage of fixed successful than others? Specifically, why did the exchange rates is that they reduce the transac- classical gold standaid last for almost a ceo t urv tions costs of exchange. The key disadvantage is (at least for ( reat Britain) and why did Bret ton that in a world of wage and price stickiness the Woods endure for only 25 years (or less)? Why benefits of reduced transactions costs may he was the EMS successful for only a few years? on tweighed by the costs of more volatile output and employment.
    [Show full text]