Taxing Speculative Trades as a Prudential Policy

Junghum Parl ()
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Junghum Parl: Bank of Lithuania

No 138, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: Motivated by the policy debate on financial transaction taxes, this paper analyzes a model of primary financial markets with financially constrained entrepreneurs and investors subject to assetholding costs or risk aversion, as well as its extension with secondary-market trades which arise from a shock to some of these investors. The analysis of the basic model indicates underproduction in the real sector and overissuance of underpriced assets, calling for policy intervention. Next, the extended model is analyzed to characterize the optimal policy mix to correct these inefficiencies, which consistently involves subsidizing primary-market asset purchases and taxing secondarymarket transactions. The latter can be viewed as a Tobin-tax-like policy instrument to reduce price fluctuations across states and its rate is higher for riskier and more profitable asset issuers.

Keywords: Financial transaction taxes; Pecuniary externality; Financial friction; Financial constraints (search for similar items in EconPapers)
JEL-codes: G11 G18 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2025-12-08
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