a growth model of inflation tax evasion and financial repression abstract this paper studies the relation between policies of financial repression inflation rates and long term growth we set up a model which shows that governments might want to express the financial sector because this sector is an easy source of resources for the public budget the inflation tax to the extent that the financial sector increases the efficiency of the allocation of savings to productive investment the choice of the degree of financial development will have real effects on the growth rate of the economy in countries where tax evasion is large the government will optimally choose to repress the financial sector in order to increase seigniorage taxation this policy will then reduce the efficiency of the financial sector increase the costs of intermediation reduce the amount of investment and reduce the growth rate of the economy financial repression will therefore be associated with high tax evasion low growth and high inflation

taxing the unobservable the impact of the shadow economy on inflation and taxation summary because the shadow economy cannot be taxed it erodes the tax base and reduces tax revenues forcing governments to resort to other ways to finance their expenditures accordingly a larger shadow economy should give governments an incentive to shift revenue sources from taxes to inflation in line with the public finance motive of inflation in this paper we recall that point in a simple canonical model then empirically test it in a sample of up to 153 developed and developing countries over the 1999 2007 period in line with the model s prediction we indeed observe a positive relation between inflation and the size of the shadow economy and a negative relation between the tax burden and the size of the shadow economy we find that both relations are conditional on central bank independence and on the exchange rate regime implying that it is the strongest in institutional set ups that constrain monetary policy the least both relations are present in the sub sample of developed countries as well as the sub sample of developing countries both relations survive several robustness checks using various sets of control variables including the stock of debt controlling for endogeneity using alternative estimates of the shadow economy and estimating the two relations as a system of equations

the effect of taxes on labor supply in the underground economy this paper uses micro data from a randomized survey carried out in the metropolitan area of quebec city canada to analyze the decision to evade taxes and work in the underground economy the results indicate that taxes distort labor market activities away from the regular sector to the underground sector but the distortion is small for the average worker the distortion is large however for particular groups of the population such as welfare claimants copyright 1994 by american economic association

what went wrong the erosion of relative earnings and employment among young black men in the 1980s this paper shows a widening in black white earnings and employment gaps among young men from the mid 1970s through the 1980s earnings gaps increased most among college graduates and in the midwest while gaps in employment population rates grew most among dropouts we attribute the differential widening to shifts in demand for subgroups due to shifting industry and regional employment the falling real minimum wage and deunionization the growing supply of black to white workers that was marked among college graduates and to increased crime among dropouts the different factors affecting subgroups highlight the economic diversity of black americans

organized labor and racial wage inequality in the united states why have african american private sector unionization rates surpassed those of white workers for decades and how has private sector union decline exacerbated black white wage inequality using data from the current population survey 1973 2007 the authors show that african americans join unions for protection against discriminatory treatment in nonunion sectors a model predicted wage series also shows that among women black white weekly wage gaps would be between 13 and 30 lower if union representation remained at high levels the effect of deunionization on racial wage inequality for men is less substantial but without deunionization weekly wages for black men would be an estimated 49 higher the results recast organized labor as an institution vital for its economic inclusion of african american men and women this study points to the need to move beyond class based analyses of union decline to an understanding of the gendered role unions once played in mitigating racial inequality

tax evasion financial development and inflation theory and empirical evidence abstract using a standard overlapping generations monetary production economy faced with endogenously determined tax evasion by heterogeneous agents in the economy we provide a theoretical model that indicates that both a lower higher level of financial development and a higher lower level of inflation leads to a bigger smaller shadow economy these findings are empirically tested within a panel econometric framework using data collected for 150 countries over the period 1980 2009 to enable a broad generalisation of the results the results support the developed theoretical model even after having accounted for the differences in the levels of economic development the level of institutional quality that includes different tax regimes and regulatory frameworks central bank participation in the economy as well as different macroeconomic policies

tax evasion and the optimal inflation tax abstract we developed a simple monetary model to study the effects of tax evasion on the optimal inflation tax the model is constructed so that inflation might be an indirect way of taxing the underground sector of the economy we show that while there are theoretical reasons for positive optimal inflation rates the effects are quantitatively small even in countries with large underground sectors we calculate the optimal nominal interest rate for peru to be between 7 and 19 despite the fact that its underground sector is close to 40 of measured gnp according to our calculations the welfare gain of using inflation to tax the underground sector is also very small

the friedman rule in an overlapping generations model with nonlinear taxation and income misreporting this paper models a two period overlapping generations economy with money populated with individuals of different skills they face a nonlinear income tax schedule and can engage in tax evasion money serves two purposes the traditional one modeled through a money in the utility function it also facilitates tax evasion the main message of the paper is that income tax evasion in this framework leads to the violation of the friedman rule the paper also shows that even in the absence of tax evasion when optimality requires differential commodity taxation complementarity of real cash balances and labor supply does not guarantee the optimality of the friedman rule as a boundary solution an additional assumption is required

inflation volatile public spending and endogenously sustained growth i construct a model of an economy whose government finances volatile public spending via money creation the model jointly accounts for the emergence of some well known empirical observations specifically it predicts a negative correlation between output growth and policy volatility furthermore given that both the mean and the variance of the inflation rate are elevated by fluctuations in public spending the model provides a novel theoretical justification for the simultaneous negative correlation of long run growth with both average inflation and inflation variability the model also supports the view that policy volatility reduces social welfare

seigniorage in a cross section of countries empirical investigation of the average level of seigniorage in a cross section of up to ninety countries for the period 1971 90 suggests that optimum tax theory explains up to 40 percent of the cross country variation in seigniorage since seigniorage is higher where its deadweight losses are probably lower and where deadweight losses from conventional taxation are probably higher but that average government spending is not a determinant of seigniorage practical concerns about financing transitory government spending explain some of the remaining variation in seigniorage and central bank independence and political instability are useful as well in contrast 90 percent of the cross country variation in conventional taxation appears to be determined by the level of government spending and deadweight losses and additional variables do not add to the results

the optimal inflation tax when money reduces transactions costs abstract it has been argued that if money acts as an intermediate good the optimal inflation tax is zero this paper reexamines such a claim in the context of a model in which money reduces transactions costs it is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero the optimality of a zero inflation tax depends on the properties of the transactions costs technology in particular if the transactions costs technology does not exhibit constant returns to scale it is optimal to resort to the inflation tax

transaction services inflation and welfare this paper is motivated by empirical observations on the comovements of currency velocity inflation and the relative size of the credit services sector we document these comovements and incorporate into a monetary growth model a credit services sector that provides services that help people economize on money our model makes two new contributions first we show that direct evidence on the appropriately defined credit service sector for the united states is consistent with the welfare cost measured using an estimated money demand schedule second we provide estimates of the welfare cost of inflation that have some new features

shadow economies at times of banking crises empirics and theory this paper investigates the response of the shadow economy to banking crises our empirical analysis based on a large sample of countries suggests that the informal sector is a powerful buffer which expands at times of banking crises and absorbs a large proportion of the fall in official output to rationalise our evidence we build a dynamic stochastic general equilibrium model which accounts for financial and labour market frictions and for nominal rigidities in line with the empirical literature on the shadow economy we assume that in the informal sector access to external finance is limited and the production technology is relatively more labour intensive following a banking shock in the official sector the model predicts a large negative transmission to the unofficial economy that substantially dampens the overall effect of the shock

constructing labor markets the valuation of black labor in the u s south 1831 to 1867 in the u s south a free labor market rapidly although in some cases only nominally replaced the plantation system of slave labor in the years following the american civil war drawing on data comprising 75 099 transactions in the antebellum period as well as 1 378 labor contracts in the postbellum era i examine how the valuation of black labor was transformed between the 1830s and the years of emancipation i trace the process of valuation through four markets for labor moving from slave purchases and appraisals within the plantation economy to the antebellum system of hiring out to wage setting for black labor under the auspices of the freedmen s bureau comparative analysis of labor pricing across these markets reveals systematic differences slave markets placed price premiums on children and young women and occupational skills emerged as the most salient influence in the pricing of wage labor i conclude by theorizing how transvaluation of labor occurs when markets for unfree and free worker

a quantitative analysis of inflation as a tax on the underground economy abstract inflation rates are more dispersed and are persistently higher in developing countries this paper quantifies the importance of the public finance motive for inflation in the presence of a tax evading sector the underground economy the approach is motivated by the observation that the underground economy is especially large in poor countries the analysis builds on a general equilibrium monetary model with two production sectors where income in one of the sectors cannot be taxed a benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate the model is first calibrated to the u s economy and is then used for a cross country simulation the resulting relationships between the size of an underground economy inflation rate income tax rate and the share of seigniorage in the government revenue rationalize the cross country data quantitatively well

the welfare costs of moderate inflations in the recent past the view that a little bit of inflation was good for the economy was widely held the phillips curve in its earlier incarnations implied that moderate inflation was worth tolerating because it would permit lower unemployment this justification for tolerating inflation has long since been abandoned by economists and policymakers because both theory and experience showed it to be false nevertheless one legacy of this era seems to be a fairly widespread tolerance for moderate inflation recently there has been much discussion of removing this inflationary bias by passing legislation that would require the federal reserve to target zero inflation in this paper we examine some of the consequences of achieving that goal we appraise the revenue and welfare costs of policies designed to reduce moderate inflation rates to zero much has been written about why government policies may have an inflationary bias in this paper we don t address the issue of what motivates governments to inflate implicit in our analysis however is the notion that one important motive for inflation is the revenue raising potential of the inflation tax it would be difficult to argue that the inflation tax constitutes an important revenue source for the united states one indirect and very imperfect measure of this would be contributions by the federal lleserve to the treasury in recent years those rebates have amounted to

on inflation as a regressive consumption tax abstract evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed we build a monetary growth model consistent with key features of cross sectional household data and use this framework to study the distributional impact of inflation at the aggregate level our model economy behaves similar to standard monetary growth models within the representative agent abstraction inflation has however important distributional effects since it is effectively a regressive consumption tax thus neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

homework in development economics household production and the wealth of nations we introduce home production into the neoclassical growth model and examine its consequences for development economics in particular we study the extent to which one can account for international income differences with differences in policies that distort capital accumulation in models with home production such policies not only reduce capital accumulation but also change the mix of market and nonmarket activity hence these models can generate larger differences in output than standard models for a given policy differential we also show how the welfare implications change when we incorporate home production

shadow economies size causes and consequences using various methods the size of the shadow economy in 76 developing transition and oecd countries is estimated average size varies from 12 percent of gdp for oecd countries to 23 percent for transition countries and 39 percent for developing countries increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy especially in oecd countries according to some findings corruption has a positive impact on the size of the shadow economy and a growing shadow economy has a negative effect on official gdp growth

the shadow economy as an equilibrium outcome abstract we construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income unreported income requires using a payment method that avoids recordkeeping in some markets cash trade using cash to avoid taxes is the shadow economy in our model we then calibrate our model using money interest rate and gdp data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

labor markets and adjustment in open asian economies the republic of korea and malaysia this article deals with the adjustment following external shocks in two open asian economies the republic of korea and malaysia there were important differences in the economic structure of the two countries as well as significant differences in the way external events produced crises that interrupted their dynamic economic growth detailed analyses of economic cycles in the two decades preceding 1987 88 show that the behavior of factor markets particularly the markets for labor and foreign exchange helped korea to adjust quickly to the shocks but in malaysia actually caused the crisis to deepen for economies heavily dependent on exports the unit cost of labor in dollars is of central importance as an index of the competitiveness of exports and hence of their ability to mount a sustained recovery after a difficult period accordingly the heart of the analysis is the determination of the unit cost of labor and the factors affecting its change throughout the cycles concentration on this critical variable helps to spotlight the crucial differences in the factor markets of the two economies

political economy of rice price protection in asia rice continues to be the most important food staple in asia contributing 40 80 of total calorie intake rice is also the major source of livelihood of small farmers and agricultural labor households in this region where at least two thirds of arable land is planted to rice at least half of that rice area is rain fed and vulnerable to drought and floods even in irrigated areas higher cropping intensity has increased pest problems contributing further to the production instability that characterizes the rice economy of monsoon asia because of the economic and political importance of rice in asia no government has left its domestic rice sector freely influenced by market demand and supply forces invariably the central food policy question confronting asian governments is how to reconcile the conflicting objectives of providing low rice prices to consumers and remunerative incentives to farmers maintaining stable domestic rice prices to both consumers and producers is a separate and equally important concern moreover given the political importance of rice and the instability of the world rice market most asian countries aim for rice selfsufficiency rather than rely on international trade to pursue their food security goals among rice exporters on the other hand raising government revenues from rice exports is another policy objective to achieve the above objectives a wide variety of policy instruments have been used to influence output and input prices directly or to increase productivity except for thailand most asian governments control rice prices in the short run through a monopoly on international trade as well as by engaging in domestic marketing operations 1 on the other hand governments also invest in irrigation

the hard shadow of the greek economy new estimates of the size of the underground economy and its fiscal impact this article presents new estimates of the greek underground economy and explores the link between the underground economy and aggregate debt we show that the greek underground economy has been underestimated heavily and has been on a rising trend again since greece adopted the euro we also present evidence that the size of the underground economy is positively related to the debt to gdp ratio implying that fighting the underground economy is also conducive to financial and macroeconomic stability our results suggest that for our sample of 11 emu member countries the loss of the inflation tax as an economic policy instrument had drastic consequences while the underground economy did not have a statistically significant impact on aggregate debt before the introduction of the euro it has pushed up the debt to gdp ratio in our sample since

informality and the labor market effects of financial crises abstract we provide evidence based on a large sample of countries on the effects of financial crises on key labor market indicators including official and unofficial employment unemployment and the participation rate crises are followed by a drop in the official market participation rate and by an increase in informal employment these responses are strongly persistent empirical results are then interpreted with a dsge model which accounts for informality and for financial and labor market frictions in this framework the informal sector acts as a buffer which absorbs workers in bad times and vice versa our simulations suggest the informal sector also is a crisis amplifier for the official economy for a given financial shock the ensuing contraction in the official economy is deeper and more persistent the larger the initial size of the unofficial sector this implies that in less developed economies financial crises cause a relatively stronger reallocation of inputs towards less efficient sectors expose a larger fraction of the population to the adverse effects of informality cause a sharper deterioration of public finances limiting governments ability to supply public goods and to engage in countercyclical fiscal policies

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

long run trends in workers beliefs about their own job security evidence from the general social survey in recent years federal reserve chairman alan greenspan former u s secretary of labor robert reich and many journalists have argued that workers are more anxious about losing their jobs than they were in the past i use the 1977 96 general social survey to document trends in workers beliefs about their own job security during the 1990s workers have been more pessimistic about losing their jobs in the next 12 months than workers were during the 1980s workers have also been more concerned about suffering future job loss that would have resulted in a decline in earnings or a spell of unemployment

nobody s business but my own self employment and small enterprise in economic development abstract in most poor countries small firms and self employment are the dominant forms of business enterprise even in the manufacturing sector for rich countries in contrast self employed people account for very small shares of manufacturing employment and output this paper builds on lucas 1978 on the size distribution of business firms bell journal of economics 9 2 508 523 to ask whether structural changes of this kind are driven by productivity differences a model calibrated to japanese time series data is shown to mimic key features of cross country and time series data the results support the idea that changes in aggregate productivity account for much of the cross country variation in establishment size and self employment rates

money and growth revisited abstract conventional wisdom is that if public policy can affect the growth rate of the economy the welfare implications of alternative policies will be large in this paper a stochastic dynamic general equilibrium model with endogenous growth and money is examined in this setting inflation lowers growth through its effect on the return to work however the welfare costs of higher inflation are modest the endogenous labor supply is important in producing this result

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

the welfare cost of inflation in general equilibrium abstract this paper presents a general equilibrium monetary model in which inflation distorts a variety of marginal decisions although individually none of the distortions is very large they combine to yield substantial welfare cost estimates a sustained 4 percent inflation like that experienced in the us since 1983 costs the economy the equivalent of 0 41 percent of output per year when currency is identified as the relevant definition of money and over 1 percent of output per year when m1 is defined as money the results illustrate how the traditional partial equilibrium approach can seriously underestimate the true cost of inflation

explaining the black white gap in labor force participation among women heading households for the first time in this century black women are participating in the labor force at lower rates than are white women the black white gap in female labor force participation is driven by those in the severest need of income women heading households the author compares three explanations of the black white gap in labor force participation among female household heads lack of human capital lack of opportunities resulting from industrial restructuring and disarticulation from mainstream institutions as described by theories of the underclass using a representative national sample from the panel study of income dynamics he finds that lower rates of labor force participation among black women heading households are determined by black white differences in human capital as well as by characteristics associated with a breakdown in the processes linking black women to the labor market overall the largest impediments to labor force participation among women heading households are dropping out of high school having a child under the age of six in the household and being a long term welfare recipient

sources of racial wage inequality in metropolitan labor markets racial ethnic and gender differences research on racial inequality has become increasingly specialized often focusing on a single explanation and subgroup of the population in a diverse society a broader comparative framework for interpreting the causes of wage inequality for different racial ethnic and gender groups is called for the effects of a range of different factors on the wages of latinos asians and blacks relative to whites and separately for women and men are examined new sources of racial wage inequality are also considered significant differences are found in the sources of wage inequality across race ethnicity and gender differences are generally greater between racial and ethnic groups than between men and women key findings include a large negative effect of immigration on the relative wages of latinos and asians and only a small effect on the relative wages of black women and no effect on black men in contrast the relative wages of blacks remain most affected positively by the presence of manufacturing employment and unions new economy indicators of high skill services and flexible employment conditions play only a secondary role in explaining metropolitan racial wage inequality

tax rates governance and the informal economy in high income countries i introduction informal economic activity was long thought to be a feature of developing countries formalization of business was supposed to go hand in hand with economic development however even among high income countries a large part of economic activity is informal according to schneider 2002 16 7 of gross domestic product gdp in high income oecd organisation for economic cooperation and development countries was informally produced in 2001 2002 the author defines the informal economy as all economic activities which would generally be taxable were they reported to the state tax authorities p 4 in this sense both the informal economy and tax evasion are measures of the same phenomenon while tax evasion refers to the amount of forgone tax revenues the term informal economy encompasses the amount of production that escapes taxation 1 schneider s 2002 estimates of the informal economy of 21 high income oecd countries are reproduced in figure 1 2 these numbers have been obtained by the so called currency demand approach which estimates currency demand as a function of interest rate per capita income proportion of wages and salaries in aggregate output and tax rates excess demand of currency caused by a rise in tax rates is attributed to an increase in the informal economy 3 thus while the currency demand approach establishes a relationship between increasing tax rates and increasing informality within a country it does not imply any built in relationship between tax rates and the size of the informal economy across countries figure 1 omitted numbers in figure 1 show that there are large differences in the size of the informal economy even across high income countries in greece the informal economy amounted to 28 5 of gdp while in the united states the estimate was 8 7 4 put differently the production of legal final goods and services worth 892 billion about 3 090 per capita went untaxed in the united states while in greece 49 billion about 4 380 per capita escaped taxation given these large differences in the size of the informal economy even across high income countries the following two questions arise what are the driving forces behind informal economic activity in high income countries and to what extent can differences in these driving forces account for cross country differences in informality a paper by davis and henrekson 2005 suggests a natural answer to the first question across 14 high income oecd countries the authors find a positive and significant relationship between tax rates and the size of the informal economy figure 2 replicates their results and shows the relationship between tax rates on income and consumption and social security contributions and the size of the informal economy however despite a positive relationship between tax rates and informality countries with equally high tax rates have strikingly different estimates of their informal economies in 1995 1996 spain and the netherlands had similar total tax rates on income and consumption and social security contributions of around 67 the netherlands informal economy was estimated to amount to 13 7 of gdp while the estimate for spain was 22 4 apart from tax rates additional forces seem to drive informality in high income countries low institutional quality and corruption are possible suspects their close relationship to the size of the informal economy has been highlighted by various empirical studies friedman et al 2000 chong and gradstein 2007 and johnson kaufmann and zoido lobaton 1998 all find a positive relationship between low institutional quality a large regulatory burden corruption and the size of the informal economy the relationship between institutional quality and informality also holds across the sample of 21 high income countries figure 3 shows the negative relationship between the size of the informal economy and the commonly used world bank governance indicators on government effectiveness regulatory quality rule of law and control of corruption