Beyond Keynes, Volume One
Edited by Shelia C. Dow and John Hillard
Chapter 12: Policies for fighting speculation in foreign exchange markets: the Tobin tax versus Keynes's views
12. Policies for ﬁghting speculation in foreign exchange markets: the Tobin tax versus Keynes’s views Paul Davidson I INTRODUCTION In the classical model, where agents know the future with perfect certainty or, at least, can form statistically reliable predictions without persistent errors (that is, rational expectations), speculative market activities can be justiﬁed as stabilizing. When, on the other hand, the economic future is uncertain (non-ergodic), today’s agents ‘know’ they cannot reliably predict future outcomes. Hicks (1979: vii) has argued that, if economists are to build models which reﬂect real world behaviour, then the agents in these models must ‘know that they just don’t know’ what is going to happen in the future. In the uncertain world we live in, therefore, people cannot rely on historical or current market data to forecast future prices reliably (that is, in the absence of reliable institutions that ensure orderly spot markets, there can be no reliable existing anchor to future market prices). In such a world, speculative activities cannot only be highly destabilizing in terms of future market prices, but the volatility of these future spot prices can have costly real consequences for the aggregate real income of the community. Nowhere has this been made more obvious than in the machinations of the foreign exchange markets since the end of the Bretton Woods era of ﬁxed exchange rates. Eichengreen, Tobin and Wyplosz (hereafter ETW) (1995) have recognized the potential high real costs of speculative destabilizing economic activities that can occur if governments...
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