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The Relationship Between Financial Transactions Costs and Economic Growth


  • Dean Baker
  • Helene Jorgensen


The opponents of financial transactions taxes (FTTs) have argued that the imposition of such taxes will slow economic growth by raising the cost of capital. The argument is that if the cost of buying and selling stock and other financial assets is higher, then it makes it more expensive for firms to raise capital. This is true even if the initial sale is exempted from the tax, since the fact that future sales will be subject to the tax will lower the price of stocks sold in the secondary market, which would mean that even initial offerings will command a lower price. However, there are reasons for believing that offsetting factors could mean that higher transactions costs do not have a negative impact on growth and could even have a positive impact. This paper reviews some of the arguments as to why higher transactions costs may actually lead to better working financial markets. It then examines the relationship between growth and transactions costs for a limited set of countries for which transactions cost data are available. It finds that for this group of countries that is a strong positive relationship, with higher transactions costs actually being associated with higher growth.

Suggested Citation

  • Dean Baker & Helene Jorgensen, 2012. "The Relationship Between Financial Transactions Costs and Economic Growth," CEPR Reports and Issue Briefs 2012-10, Center for Economic and Policy Research (CEPR).
  • Handle: RePEc:epo:papers:2012-10

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    References listed on IDEAS

    1. Fernald, Lia C.H. & Hidrobo, Melissa, 2011. "Effect of Ecuador's cash transfer program (Bono de Desarrollo Humano) on child development in infants and toddlers: A randomized effectiveness trial," Social Science & Medicine, Elsevier, vol. 72(9), pages 1437-1446, May.
    2. Mark Weisbrot & Luis Sandoval, 2009. "Update on the Ecuadorian Economy," CEPR Reports and Issue Briefs 2009-22, Center for Economic and Policy Research (CEPR).
    3. Christina Paxson & Norbert Schady, 2010. "Does Money Matter? The Effects of Cash Transfers on Child Development in Rural Ecuador," Economic Development and Cultural Change, University of Chicago Press, vol. 59(1), pages 187-229, October.
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    Cited by:

    1. Lillo, Felipe & Vald├ęs, Rodrigo, 2016. "Dynamics of financial markets and transaction costs: A graph-based study," Research in International Business and Finance, Elsevier, vol. 38(C), pages 455-465.

    More about this item


    taxes; speculation; transactions; economic growth;

    JEL classification:

    • G - Financial Economics
    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H - Public Economics
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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