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A Quantitative Analysis Of Tax Enforcement And Optimal Monetary Policy

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  • Arbex, Marcelo

Abstract

This paper explores the consequences of tax enforcement policies for monetary policy. Agents may evade taxes by working in the informal sector, but they are detected with positive probability. Workers are rewarded with government benefits that are proportional to formal (taxed) work. When enforcement is imperfect and collecting taxes is costly, the optimal inflation rate is positive and inflation becomes a second-best tax. Deviations from the Friedman rule are optimal and depend on the tax enforcement policies. Using U.S. data, we compute the quantitative effect of different tax structures on inflation and interest rate. We show that different tax enforcement and government spending (benefits) policies induce different optimal outcomes for inflation and interest rates.

Suggested Citation

  • Arbex, Marcelo, 2013. "A Quantitative Analysis Of Tax Enforcement And Optimal Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 17(5), pages 1096-1117, July.
    • Handle: RePEc:cup:macdyn:v:17:y:2013:i:05:p:1096-1117_00
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    Cited by:

    1. Bernardino Adão & André C. Silva, 2021. "Government financing, inflation, and the financial sector," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1357-1396, June.
    2. Yuhn, Ky-hyang & Bennett, Christopher S., 2016. "A Note On The Bush Tax Cuts: Did They Succeed In Stimulating Business Investment?," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1623-1639, September.
    3. Bernardino Adao & Andre C. Silva, 2017. "Sub-optimality of the Friedman rule with distorting taxes," Nova SBE Working Paper Series wp623, Universidade Nova de Lisboa, Nova School of Business and Economics.
    4. Bernardino Adão & André C. Silva, 2019. "Real transfers and the Friedman rule," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 155-177, February.
    5. Claudio Cesaroni, 2017. "Optimal Long-Run Inflation and the Informal Economy," Bank of Lithuania Working Paper Series 46, Bank of Lithuania.

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