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Central Bank Digital Currency, Tax Evasion, Inflation Tax, and Central Bank Independence

Author

Listed:
  • Ohik Kwon

    (Economic Research Institute, Bank of Korea)

  • Seungduck Lee

    (Department of Economics, Sungkyunkwan University)

  • Jaevin Park

    (Department of Economics, University of Mississippi)

Abstract

Can introducing Central Bank Digital Currency (CBDC) improve social welfare? We construct a dual currency model to study whether introducing CBDC with a recordkeeping technology can reduce tax evasion incentives in cash transactions, and further achieve a better allocation than in a cash-only economy. Tax evasion does not occur in an economy only with an inflation tax. However, if imposing a positive sales tax is inevitable for central bank independence, there arises an inefficiency associated with tax evasion in cash transactions. Introducing CBDC with positive interest can reduce this inefficiency and thus improve welfare by discouraging tax evasion, and rewarding tax payments.

Suggested Citation

  • Ohik Kwon & Seungduck Lee & Jaevin Park, 2020. "Central Bank Digital Currency, Tax Evasion, Inflation Tax, and Central Bank Independence," Working Papers 2020-26, Economic Research Institute, Bank of Korea.
  • Handle: RePEc:bok:wpaper:2026
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    References listed on IDEAS

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    Cited by:

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    3. Bajaj, Ayushi & Damodaran, Nikhil, 2022. "Consumer payment choice and the heterogeneous impact of India’s demonetization," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    4. Ferry Syarifuddin & Toni Bakhtiar, 2021. "Monetary Policy Strategy In The Presence Of Central Bank Digital Currency," Working Papers WP/09/2021, Bank Indonesia.

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    More about this item

    Keywords

    Cash; Central Bank Digital Currency; Monetary Policy; Inflation Tax; Tax Evasion;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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