The Impact of Financial Transactions Taxes on Money Demand in Colombia

Some countries in Latin America have introduced a tax on bank withdrawals in order to increase revenue. The debit tax has usually been levied in periods of economic turbulence. This paper analyzes the effects of such a tax on real cash holdings and on balances of different types of bank accounts in Colombia. The paper analyzes data for the period 1994 to 2007 and then verifies the robustness of the model using only the data from 2000 to 2007, thereby eliminating the economic crisis of the late 1990s. The results show that even though the tax caused a decrease in checking account balances, the changes produced in total balances of real cash after 2001 cannot be attributed to the debit tax. However, an increase in the rate of growth of savings account balances can be attributed to it, suggesting a substitution from checking toward savings accounts.