Financial Transaction Tax

Essay by Anonymous UserUniversity, Ph.D.A+, January 1996

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The soaring volume of international finance and increased interdependence in

recent decades has increased concerns about volatility and threats of a financial crisis.

This has led many to investigate and analyze the origins, transmission, effects and policies

aimed to impede financial instability. This paper argues that financial liberalization and

speculation are the most reflective explanations for instability in financial markets and that

financial instability is likely to be transmitted globally with far reaching implications on real

sector performance. I conclude the paper with the argument that a global transaction tax

would be the most effective policy to curb financial instability and that other proposed

policies, such as target zones and the creation of a supranational institution, are either

unfeasible or unattainable.


In this section I examine four interpretations of how financial instability arises.

The first interpretation deals with speculation and the subsequent "bandwagoning" in

financial markets.

The second is a political interpretation dealing with the declining status

of a hegemonic anchor of the financial system. The question of whether regulation causes

or mitigates financial instability is raised by the third interpretation; while the fourth view

deals with the "trigger point" phenomena.

To fully comprehend these interpretations we must first understand and

differentiate between a "currency" and "contagion" crisis. A currency crisis refers to a

situation is which a loss of confidence in a country's currency provokes capital flight.

Conversely, a contagion crisis refers to a loss of confidence in the assets denominated in a

particular currency and the subsequent global transmission of this shock.

One of the more paramount readings of financial instability pertains to speculation.

Speculation is exhibited in a situation where a government monetary or fiscal policy (or

action) leads investors to believe that the currency of that particular nation will either

appreciate or...