Securities Transactions Taxes and Financial Crises

Abstract

This paper assesses the impact that a widely-based Securities Transaction Tax (STT) could have on the likelihood of systemic financial crises. We apply the methodology developed by Demirguc-Kunt and Detragiache (1998) [IMF Staff Papers 45 (1)] to a panel dataset of 34 OECD countries for the sample 1973–2012, using a measure of a country’s average bid-ask spread in financial markets as a proxy for the likely effect of a STT on transactions costs. Our results indicate that the establishment of a STT could sizeably increase the risk of financial crises.