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Financial Transaction Taxes and Fire Sales

  • Felix Bierbrauer

    (University of Cologne)

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    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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    File URL: https://www.economicdynamics.org/meetpapers/2013/paper_433.pdf
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    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
    Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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    Web page: http://www.EconomicDynamics.org/society.htm
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    1. 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.
    2. Michael Keen, 2011. "The Taxation and Regulation of Banks," IMF Working Papers 11/206, International Monetary Fund.
    3. Allen, Franklin & Carletti, Elena, 2008. "Mark-to-market accounting and liquidity pricing," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 358-378, August.
    4. Perotti, Enrico C & Suarez, Javier, 2011. "A Pigovian Approach to Liquidity Regulation," CEPR Discussion Papers 8271, C.E.P.R. Discussion Papers.
    5. 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.
    6. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
    7. 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.
    8. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
    9. repec:dgr:uvatin:2011040 is not listed on IDEAS
    10. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    11. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
    12. repec:dgr:uvatin:20110040 is not listed on IDEAS
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