On the Incidence of a Financial Transactions Tax in a Model with Fire Sales
36 Pages Posted: 6 Jul 2012
Date Written: June 29, 2012
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: Suggested Citation