Financing Government Expenditures Optimally
In a simple cash-credit model, I study the effects of the combination of costly tax collection and tax evasion on fiscal and monetary policy for optimal resource allocation. Allowing the informal sector to use cash more intensively than the formal sector, I compute the optimal interest and tax rates for eleven OECD countries to finance their exogeneously given government spending. A comparison of the actual and optimal interest rates reveals that tax collection costs and tax evasion together can partly explain the cross-country differences in monetary policy, also rationalizing deviations from the Friedman Rule in the long-run.
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- Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-254, March.
- Nicolini, Juan Pablo, 1998. "Tax evasion and the optimal inflation tax," Journal of Development Economics, Elsevier, vol. 55(1), pages 215-232, February.
- Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
- repec:cup:macdyn:v:7:y:2003:i:3:p:333-62 is not listed on IDEAS
- Pinar Yesin, 2004. "Tax Collection Costs, Tax Evasion and Optimal Interest Rates," Working Papers 04.02, Swiss National Bank, Study Center Gerzensee.
- Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303-303. Full references (including those not matched with items on IDEAS)
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