Economic Research and Perspectives

Economic Research and Perspectives

Tobin Tax and Shocks on the Balance of Payment A DSGE Approach

Authors
Mohammad Nikzad 1
Mahdi Yazdani 2
1 Ph.D. in Economics, Faculty of Economics and Political Science, Shahid Beheshti University, Tehran, Iran
2 Assistant Professor of Economics, Faculty of Economics and Political Science, Shahid Beheshti University, Tehran, Iran
10.22034/24.3.313
Abstract
Introduction

Balance of payment (BOP) shocks are one of the most important factors causing instability in economies that rely heavily on raw material export. Due to its dependence on oil revenues, the Iranian economy has been affected by balance of payment impulses in different eras, which have led to the instability of the macro-economy, especially the fluctuation of exchange rate, and sometimes occurrence of currency crisis. In the literature of public finance, there are several types of taxes on financial transactions, each of which has been introduced according to a specific purpose. Nevertheless, these taxes have common characteristics that are considered as basis for their selection and implementation at some point of time, especially during the periods of financial crises. These include curbing fluctuations of financial markets, collecting fair taxes and the possibility of reducing tax evasion compared to other taxes as the most important features. Tobin's original idea was a double tax on currency transactions, which is due when the currency is bought and sold. The mentioned tax has a bias towards long-term investment and leads to moving away from short-term speculation and ultimately creating economic stability. In general, this tax can lead to its spending by increasing investment returns and increasing economic stability.

Methodology

One of the presented instruments in the literature of open macroeconomics in order to control excessive exchange rate fluctuations, especially when the economy is faced with exogenous negative impulses such as international sanctions, is to control capital outflow through the Tobin tax in the exchange rate market. In this study, by presenting a DSGE model for an open economy and compatible with the conditions of the Iranian economy, it was tried to evaluate the role of Tobin Tax in stabilizing macroeconomic variables. The focus was especially on evaluating the exchange rate in response to the shocks of the balance of payment in the framework of the managed floating exchange rate system. The presented model in this paper is simulated using the Dynare program that runs in MATLAB software. Daynar is able to find steady-state values for variables of the model and calculates impulse response paths of variables in case of economic shocks. At this stage, the pattern is written in the form of a Dynare file, which should have 5 sections that include the introduction of all variables (including endogenous and exogenous variables and parameters), the equations in the model, the initial values of the variables, and the available impulses. If all the steps above are done correctly, the Dynare program simulates the model and produces the impulse response functions for the variables of model against the included impulses and a summary of the moments of the simulated variables. Hence, in this study, it will be tried to evaluate the role of Tobin Tax in controlling the balance of payments innovations in the framework of the management floating exchange rate system.

Results and Discussion

The results of the analyzed variables show that with the negative shock of oil export, the output also decreases. Due to the decrease in the foreign exchange reserves, the real exchange rate has increased initially. With a decrease in the output and an increase in the real exchange rate, inflation increases at first. With a decrease in the amount of the output, also the consumption will decrease. Finally, with a decrease in the amount of the oil exports, the balance of payment has also been disturbed. The results of the impulse response functions of the oil export as a balance of payment shock showed that the application of Tobin Tax has reduced the variance of the exchange rate resulting from balance of payment shocks, which is in accordance with the economic literature. The obtained results have also shown that, Tobin tax has reduced the deviations of inflation and the output that the welfare loss function have decreased.

Conclusion

Therefore, according to the resuls, the policymaker can use the Tobin tax as a more transparent and efficient policy tool than quotas in the exchange rate market, which lead to provide more efficiency exchange rate market in mid and long-run.
Keywords
Tobin Tax
Balance of Payment Shock
Oil Export
Dynamic Stochastic General Equilibrium Model

Subjects

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Economic Research and Perspectives
Volume 24, Issue 3
Autumn 2024
Pages 313-343