The Tobin Tax ?A Solution to the Problems of Globalization?
1. Introduction
Recently, there is a fierce academic and political discussion about chances and risks of globalization. Especially globalization of financial markets not only enhances the allocation of capital and support trade in goods and services through lower transaction costs and higher liquidity. Moreover, international asset diversification and hedging opportunities lower risks, and free international financial markets make it easier to reach foreign capital, especially for emerging economies. Therefore, international financial markets raise efficiency and profits due to international division of labour. Economic growth in emerging countries is not only enhanced by the availability of foreign capital but also by developing local financial centres that pave the way to international business. On the other hand, low transaction costs encourage speculation, which is said to destabilize markets, especially speculation on foreign exchange rates. High fluctuations of asset prices and exchange rates are a source of uncertainty for the real sector and cause misallocation. Hedging those risks is costly and in some cases not or only partly possible. Another crucial point against free financial markets is the loss of independence of economic policy. Under free convertibility of the currency and free capital markets, autonomous economic policy is only possible with free floating exchange rates but not with fixed ones. Therefore, if a country's objective is currency stability, it will have to give up the independence of its economic policy. Thus, governments lose their sovereignty over financial markets. Globalization of financial markets has been raising global foreig ...