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The societal benefit of a financial transaction tax

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  • Aleksander Berentsen
  • Samuel Huber
  • Alessandro Marchesiani

Abstract

We provide a novel justification for a financial transaction tax for economies, where agents face stochastic consumption opportunities. A financial transaction tax makes it more costly for agents to readjust their portfolios of liquid and illiquid assets in response to these liquidity shocks, which increases the demand for - and the price of liquid assets. The higher price improves liquidity insurance and welfare for other market participants. We calibrate the model to U.S. data and find that the optimal financial transaction tax is 1.6 percent and that it reduces the volume of financial trading by 17 percent.

Suggested Citation

  • Aleksander Berentsen & Samuel Huber & Alessandro Marchesiani, 2014. "The societal benefit of a financial transaction tax," ECON - Working Papers 176, Department of Economics - University of Zurich, revised Jul 2016.
  • Handle: RePEc:zur:econwp:176
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The societal benefits of a financial transaction tax
      by Christian Zimmermann in NEP-DGE blog on 2014-11-19 22:36:25

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    Cited by:

    1. Taneli Mäkinen & Francesco Palazzo, 2017. "The double bind of asymmetric information in over-the-counter markets," Temi di discussione (Economic working papers) 1128, Bank of Italy, Economic Research and International Relations Area.
    2. Samuel Huber & Jaehong Kim, 2015. "The role of trading frictions in financial markets," ECON - Working Papers 211, Department of Economics - University of Zurich, revised Jul 2017.
    3. repec:eee:dyncon:v:79:y:2017:i:c:p:184-200 is not listed on IDEAS
    4. Zachary Bethune & Tai-Wei Hu & Guillaume Rocheteau, 2018. "Optimal Credit Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 231-245, January.
    5. Geromichalos, Athanasios & Herrenbrueck, Lucas, 2016. "The Strategic Determination of the Supply of Liquid Assets," MPRA Paper 71454, University Library of Munich, Germany.
    6. Huber, Samuel & Kim, Jaehong, 2017. "On the optimal quantity of liquid bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 184-200.
    7. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.

    More about this item

    Keywords

    Tobin tax; financial transaction tax; OTC trading;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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