Macroeconomic implications of a tax on banks’ profits

Hiona Balfoussia and Dimitris Papageorgiou

Economic Bulletin, 2025, issue 62, 39-50

Abstract: This paper investigates the potential macroeconomic effects of a tax on banks’ profits for the Greek economy. To this end, a Dynamic Stochastic General Equilibrium (DSGE) model is employed, which allows the identification of the main transmission channels through which a tax on bank profits may affect the real economy and the financial sector. We find that such a tax affects the economy primarily via the banking capital channel and the bank funding channel, constraining the supply of credit, reducing the value of banking collateral and potentially leading to a contraction in economic activity. Overall, the findings highlight that a tax on bank profits may generate adverse effects on both the financial sector and the real economy, underscoring the need for careful policy design and evaluation of such a policy measure.

Keywords: bank profit taxation; banking capital; bank funding cost; Greece; dynamic stochastic general equilibrium model (search for similar items in EconPapers)
JEL-codes: E44 E62 G21 O52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:bog:econbl:y:2025:i:62:p:39-50

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