Chapter

Efficient Intervention in Financial Capital Markets

December 1978

December 1978

DOI:10.1016/B978-0-12-339650-1.50014-0

In book: A Theory of International Trade Under Uncertainty (pp.139-155)

Authors:

Elhanan Helpman

Harvard University

Tel Aviv University

This chapter discusses the efficient intervention in financial capital markets. It presents an argument for equity taxation that is the counterpart of the optimal tariff argument. For this purpose, it is assumed that the country has no monopoly power in commodity markets and it faces given commodity prices in every state of the world. In addition, it is assumed that there are no restrictions on trade in commodities. It is also clear that there exists no combination of taxes on the purchases and sales of equities, which increase welfare. It is found that as taxes on equity imports can be considered as the combinations of taxes on purchases and sales of equities, they also cannot lead to a welfare improvement. In the optimal intervention in financial capital flows in the presence of unremovable tariffs and the absence of feasible policy tools for intervening in commodity markets, it is shown that it is optimal to tax the sales of equities by the import-competing industry at the tariff rate and that the taxation of equity purchases may or may not be required.

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