Speculative asset price dynamics and wealth taxes (Q2064592)

The paper extends the model of \textit{W. A. Brock} and \textit{C. H. Hommes} [J. Econ. Dyn. Control 22, No. 8--9, 1235--1274 (1998; Zbl 0913.90042)] along two directions. First, the policymakers are allowed to impose a tax on speculators' wealth. Second, the supply of (outside) shares of the risky asset is allowed to be positive. In particular, this assumption implies that the fundamental value of the risky asset entails a risk premium (which is absent in the original model by Brock \& Hommes). The authors show that higher wealth taxes increase the risky asset's fundamental value, enlarge its local stability domain and may prevent the birth of nonfundamental steady states. The analysis suggests that wealth taxes tend to stabilize the dynamics of financial markets.