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The societal benefit of a financial transaction tax

Listed author(s):
  • Aleksander Berentsen
  • Samuel Huber
  • Alessandro Marchesiani

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.

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Paper provided by Department of Economics - University of Zurich in its series ECON - Working Papers with number 176.

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Date of creation: Oct 2014
Date of revision: Jul 2016
Handle: RePEc:zur:econwp:176
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