The societal benefit of a financial transaction tax

Aleksander Berentsen, Samuel Huber () and Alessandro Marchesiani ()

European Economic Review, 2016, vol. 89, issue C, 303-323

Abstract: We provide a novel justification for a financial transaction tax for economies where agents face stochastic consumption opportunities. A financial transaction tax makes it more costly for agents to readjust their portfolios of liquid and illiquid assets in response to liquidity shocks, which increase both the demand for and the price of liquid assets. The higher price improves liquidity insurance and welfare for other market participants. We calibrate the model to U.S. data and find that the optimal financial transaction tax is 1.6% and that it reduces the volume of financial trading by 17%.

Keywords: Financial transaction tax; Tobin tax; Pecuniary externality; Financial intermediation (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (19)

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Working Paper: The societal benefit of a financial transaction tax (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:89:y:2016:i:c:p:303-323

DOI: 10.1016/j.euroecorev.2016.08.003

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