Monetary policy and tobin Taxes: A welfare analysis

Description

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes on capital flows. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.

Publication Date

1-1-2013

Keywords

Monetary policy, Noise traders, Fixed exchange rates, Tobin taxes, Optimal monetary policy

Conference

2nd Delhi workshop in macroeconomics, 27th September, 2013, Indian Statistical Institute, Delhi Centre

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