nep-ifn New Economics Papers
on International Finance
Issue of 2014‒03‒01
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Foreign Ownership of U.S. Safe Assets: Good or Bad? By Jack Favilukis; Sydney C. Ludvigson; Stijn Van Nieuwerburgh
  2. Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax By Huber, Jürgen; Kirchler, Michael; Kleinlercher, Daniel; Sutter, Matthias

  1. By: Jack Favilukis; Sydney C. Ludvigson; Stijn Van Nieuwerburgh
    Abstract: The last 20 years have been marked by a sharp rise in international demand for U.S. reserve assets, or safe stores-of-value. We argue that these trends in international capital flows are likely to be a boon for some but a bane for others. Conversely, a sell-off of foreign government holdings of U.S. safe assets could be tremendously costly for some individuals, while the possible benefits to others are several times smaller. In a general equilibrium lifecycle model with aggregate and idiosyncratic risks, we find that the young and oldest households may benefit substantially from such capital inflows, but middle-aged savers may suffer from greater exposure to systematic risk in equity and housing markets. In some states, the youngest working-age households would be willing to forgo 0.20% of lifetime consumption, while the oldest retired households would be willing to forgo over 1%, in order to avoid just one year of a typical annual decline in foreign holdings of the safe asset. By contrast, middle-aged savers could benefit from an outflow. Under the veil of ignorance, a newborn in the lowest wealth quantile is willing to forego 2.7% of lifetime consumption to avoid a large capital outflow.
    JEL: G1 G11 G12 G15
    Date: 2014–02
  2. By: Huber, Jürgen (University of Innsbruck); Kirchler, Michael (University of Innsbruck); Kleinlercher, Daniel (University of Innsbruck); Sutter, Matthias (European University Institute)
    Abstract: While politically attractive in order to generate tax revenues, the effects of a financial transaction tax (FTT) are scientifically disputed, not the least because seemingly small details of its implementation may matter a lot. In this paper, we provide experimental evidence on the different effects of a FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that the effects of a tax on markets are different from a tax on residents, with negative effects of a market tax on volatility and trading volume. The residence principle shows none of these undesired effects. In addition to studying aggregate market outcomes, we investigate how individual traders react to different forms of a FTT and whether their risk attitude is related to these reactions. We find no such relationship, meaning that a FTT affects traders with different risk tolerances similarly.
    Keywords: Financial Transaction Tax, experimental finance, residence principle, market principle
    JEL: C91 G10 E62
    Date: 2014–02

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