Financial Transaction Tax and Financial Market Stability with Diverse Beliefs

Jörg Rieger

No 563, Working Papers from University of Heidelberg, Department of Economics

Abstract: This papers studies the impact of a financial transactions tax on the trading volume and asset price volatility in a model with heterogeneous beliefs. To model heterogeneous beliefs we follow Kurz (1994, 1997) and restrict the class of beliefs to the subset of rational beliefs. We study a tax on bond and asset purchases. The simulated model shows that the introduction of a transaction tax results in a lower trading volume and therefore in less liquid financial markets. Because of the decreased liquidity the volatility of the stock market increases. We also study the welfare effects of a financial transaction tax and the simulation results also show that there is only a small change in welfare.

Keywords: Transaction Tax; Financial Regulation; Heterogeneous Beliefs (search for similar items in EconPapers)
Date: 2014-05-19
New Economics Papers: this item is included in nep-mst, nep-pub and nep-reg
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