On the Incidence of a Financial Transactions Tax in a Model with Fire Sales

36 Pages Posted: 6 Jul 2012

See all articles by Felix J. Bierbrauer

Felix J. Bierbrauer

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: June 29, 2012

Abstract

This paper studies the impact of a financial transactions tax on a financial market where financial institutions trade with each other. Assets are marked to the market and financial institutions with negative equity are forced out of business. There are two main results: First, if all banks have enough liquidity so that they 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.

Keywords: financial transactions tax, financial stability, financial markets, cash-in-the-market-pricing, marking-to-market

JEL Classification: H220, G180, G210, G280

Suggested Citation

Bierbrauer, Felix J., On the Incidence of a Financial Transactions Tax in a Model with Fire Sales (June 29, 2012). CESifo Working Paper Series No. 3870. Available at SSRN: https://ssrn.com/abstract=2101081

Felix J. Bierbrauer (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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