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Noise Traders , Exchange Rate Disconnect Puzzle , and the Tobin Tax September 2008
| Content Provider | Semantic Scholar |
|---|---|
| Author | Tax, Tobin |
| Copyright Year | 2008 |
| Abstract | This paper proposes a framework to explain why the nominal and real exchange rates are highly volatile and seem to be disconnected from macroeconomic fundamentals. Two types of foreign exchange traders, rational traders and noise traders with erroneous stochastic beliefs, are introduced into a sticky-price dynamic general-equilibrium framework. The presence of noise traders creates deviations from the uncovered interest parity. As a result, exchange rates can diverge significantly from the fundamental values. Combined with local currency pricing and consumption smoothing behavior in an infinite horizon model, the presence of noise traders can help to explain the “exchange rate disconnect puzzle”. Then we show that the excess exchange rate volatility caused by the presence of noise traders can be reduced by the ‘Tobin tax’ type of policies. However, the effect of the ‘Tobin tax’ on the exchange rate volatility depends on the market structure of foreign exchange market and the interaction of the Tobin tax with other trading costs. JEL classification numbers: F41, F31, G15 |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://jennyxu.people.ust.hk/working%20paper/NoisetraderJIMFrevise.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
