The Societal Benefits of a Financial Transaction Tax

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractWe investigate the positive and normative implications of a tax on financial market transactions in a dynamic general equilibrium model, where agents face idiosyncratic liquidity shocks and financial trading is essential. Our main finding is that agents' portfolio choices display a pecuniary externality which results in too much trading. We calibrate the model to U.S. data and find an optimal tax rate of 2.5 percent. Imposing this tax reduces trading in financial markets by 30 percent.

Central Bank Purchases of Government Bonds

“…The reason is that adding search frictions increases the demand for money, which is welfare-improving, but it also increases consumption variability, since only some agents have access to the secondary …nancial market. In a similar framework to ours, Berentsen et al (2015b) …nd that the demand for money is too low in an equilibrium where trading is unconstrained and that imposing a …nancial transaction tax can correct this externality. However, imposing a …nancial transaction tax requires the central bank to operate the secondary …nancial market in order to perfectly enforce tax payment.…”

“…Our paper is therefore also related to the literature that focuses on correcting pecuniary externalities, such as Berentsen et al (2014 and2015b). Berentsen et al (2014) …nd that adding search frictions to a competitive secondary …nancial market can be welfare-improving for high in ‡ation rates.…”

“…In each period, there are three markets that open sequentially. 7 The …rst market is a secondary bond market, where agents trade money for nominal bonds. The second market is a goods market, where agents produce or consume market-2 goods.…”

“…which is determined by three components: the lump-sum money injections, t M t 1 , the money 7 Our framework is similar to Berentsen et al (2015b), which builds on Lagos and Wright (2005). However, the contribution of Berentsen et al (2015b) is di¤erent.…”

“…3 There is a rapidly growing literature which builds on the seminal contribution of Du¢ e et al (2005). See, for instance, Du¢ e et al Berentsen et al (2015b). 4 See, for instance, Greenwald and Stiglitz (1986) or Berentsen et al (2015b) for a more detailed discussion.…”