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Financial Transaction Taxes and Fire Sales

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  • Felix Bierbrauer

    (University of Cologne)

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    Abstract

    We study the impact of a nancial transactions tax on a market where financial institutions trade with each other. There are two main results: First, if all banks can honor their short-term obligations, a financial transactions tax is entirely neutral. Second, in a model with correlated investment risk and short-term financing of banks, a financial transactions tax contributes to financial distress and undoes other policy measures that are used to stabilize financial markets. In the long run, however, this tax induced change of financial market outcomes gives banks an incentive to reduce their maturity mismatch.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 433.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:433

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    1. repec:dgr:uvatin:2011040 is not listed on IDEAS
    2. Gale, D. & Allen, F., 1991. "Limited Market Participation and Volatility of Asset Prices," Weiss Center Working Papers 14-91, Wharton School - Weiss Center for International Financial Research.
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    5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    6. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, September.
    7. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
    8. Allen, Franklin & Carletti, Elena, 2006. "Mark-to-market accounting and liquidity pricing," CFS Working Paper Series 2006/17, Center for Financial Studies (CFS).
    9. Rodrigo Cifuentes & Gianluigi Ferrucci & Hyun Song Shin, 2005. "Liquidity risk and contagion," Bank of England working papers 264, Bank of England.
    10. Michael Keen, 2011. "The Taxation and Regulation of Banks," IMF Working Papers 11/206, International Monetary Fund.
    11. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
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