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Macroeconomic implications of a tax on banks’ profits

Author

Listed:
  • Hiona Balfoussia

    (Bank of Greece)

  • Dimitris Papageorgiou

    (Bank of Greece)

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.

Suggested Citation

  • Hiona Balfoussia & Dimitris Papageorgiou, 2025. "Macroeconomic implications of a tax on banks’ profits," Economic Bulletin, Bank of Greece, issue 62, pages 39-50, December.
    • Handle: RePEc:bog:econbl:y:2025:i:62:p:39-50
    DOI: 10.52903/econbull20256202
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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