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Financial Transaction Tax and Financial Market Stability with Diverse Beliefs

Rieger, Jörg

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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.

Item Type: Working paper
Series Name: Discussion Paper Series / University of Heidelberg, Department of Economics
Volume: 0563
Date Deposited: 19 May 2014 13:35
Date: April 2014
Number of Pages: 41
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: Transaction Tax, Financial Regulation, Heterogeneous Beliefs
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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