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Optimal Taxation, Inflation and the Formal and Informal Sectors

Author

Listed:
  • Saif asif Khan

    () (PhD Scholar, London School of Economics, Department of Economics.)

  • Sajawal Khan

    () (State Bank of Pakistan)

Abstract

This paper adds to the literature concerning the relationship between inflation and the degree of informality observed in developing countries. The government's optimal response, vis-á-vis usage of an inflation tax and a consumption tax, to changes in the subsistence levels of labour and consumption faced by the formal and informal sectors of the model economy is studied. Very significantly, the paper finds that having a large informal sector does not always imply a high rate of inflation for the economy; and depending on what factors explain the size of the informal sector, we may get differing results for the optimal rate of inflation.

Suggested Citation

  • Saif asif Khan & Sajawal Khan, 2011. "Optimal Taxation, Inflation and the Formal and Informal Sectors," SBP Working Paper Series 40, State Bank of Pakistan, Research Department.
  • Handle: RePEc:sbp:wpaper:40
    as

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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp40.pdf
    File Function: First version, 2011
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Optimal Taxation; Inflation; Informal Sector;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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