The Intended and Unintended Consequences of Financial-Market Regulations: A General Equilibrium Analysis
49 Pages Posted: 25 Jan 2016 Last revised: 29 Jun 2022
Date Written: March 14, 2016
In a production economy with trade in ﬁnancial markets motivated by the desire to share labor-income risk and to speculate, we show that speculation increases volatility of asset returns and investment growth, increases the equity risk premium, and reduces welfare. Regulatory measures, such as constraints on stock positions, borrowing constraints, and the Tobin tax have similar eﬀects on ﬁnancial and macroeconomic variables. However, borrowing constraints and the Tobin tax are more successful than constraints on stock positions at improving welfare because they substantially reduce speculative trading without impairing excessively risk-sharing trades.
Keywords: Tobin tax, borrowing constraints, short-sale constraints, stock market volatility, incomplete markets, differences of opinion
JEL Classification: G01, G18, G12, E44
Suggested Citation: Suggested Citation