Keynes, Uncertainty and the Global Economy
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Keynes, Uncertainty and the Global Economy

Beyond Keynes, Volume Two

Edited by Shelia C. Dow and John Hillard

The revival of interest in Keynesian economics since the late 1980s reinstates the importance of Keynes’s contribution to economic theory and policy. This is the second of two volumes in which authoritative contributions are presented by an outstanding group of international experts to celebrate Keynesian economics, and to review and further the developments of post Keynesian economics of recent years.
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Chapter 12: How do economic theorists use empirical evidence? Two case studies

Beyond Keynes, Volume Two

Roger E. Backhouse


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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