THE TOBIN TAX, ASSET ACCUMULATION, AND THE REAL EXCHANGE-RATE

We extend a standard model of exchange rate determination in a small open economy to examine the general equilibrium consequences of a tax on foreign assets. The model: (1) incorporates asset market clearing at a point in time, (2) accounts for asset accumulation over time by way of trade imbalances and the government's financing needs, and (3) broadens the government's policy options to include a tariff on the traded good and a tax on foreign assets. A capital tax results in a transitory trade deficit because agents shift to home assets; their decumulation of foreign assets is mirrored in a trade deficit. © 1991.