Would International Currency Taxation and Currency Stabilisation in Developing Countries?

Completely flexible exchange rates may be "excessively" volatile, with the implied currency misalignments leading to real inefficiencies in resource allocation and detrimental effects on economic growth. This paper analyses whether international currency taxation would be effective in calming exchange rate volatility and avoiding currency crises within the context of a simple model of exchange rate determination. It is found that the effects of a tax on foreign exchange volatility depend on the nature of speculation and whether the focus is on capital inflows or outflows.