Tobin suggested that exchange-rate volatility be controlled through a tax on international financial transactions. The analysis shows that the Tobin tax as a pure transaction tax is not viable. The tax would impair financial operations and create international liquidity problems. It is also unlikely to deter speculation.However, a possible alternative could be a two-tier rate structure consisting of a low-rate transaction tax, plus an exchange surcharge. The exchange rate could move freely within a "crawling" exchange-rate band, but overshooting the band would trigger a tax on an "externality" -which is the discrepancy between the market exchange rate and the closest margin of the band.

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