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Deviating from the Friedman Rule: A Good Idea with Illegal Immigration?

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  • Alberto Petrucci

    (Department of Economics and Finance, LUISS Guido Carli University)

Abstract

This paper studies the optimal inflation rate in a transactions costs model with illegal immigration. Although unauthorized immigrants use domestic money for making transactions and consume in the host country, their welfare does not enter the objective function of the Ramsey planner, because of their unofficial status. In this environment, the Friedman rule is nonoptimal, when only an income tax is available, as the inflation tax makes it possible to collect revenues from illegal immigrants, who are difficult to subject to taxation. When a consumption tax –that illegal immigrants have to pay when buying consumption goods in the host country– is also available, the zero inflation tax prescription is efficient only if the consumption-money ratio of domestic consumers is not greater than the illegal immigrants’ one.

Suggested Citation

  • Alberto Petrucci, 2015. "Deviating from the Friedman Rule: A Good Idea with Illegal Immigration?," Working Papers CELEG 1502, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:celegw:1502
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    References listed on IDEAS

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    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under imperfect competition," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June.
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    5. Alexandre Cunha, 2008. "The optimality of the Friedman rule when some distorting taxes are exogenous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 267-291, May.
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    7. Theodore Palivos, 2009. "Welfare effects of illegal immigration," Journal of Population Economics, Springer;European Society for Population Economics, vol. 22(1), pages 131-144, January.
    8. Alberto Petrucci, 2011. "Nonoptimality of the Friedman Rule with Capital Income Taxation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 163-183, February.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Illegal immigration; Transaction costs technology; Optimal inflation tax; Income tax; Consumption tax.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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