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Tax evasion and financial repression: A reconsideration using endogenous growth models

20 September 2012
Publication Type: Working Paper
JEL Code: E26, E63

Using two dynamic monetary general equilibrium models characterized by endogenous growth, financial repression and endogenously determined tax evasion, we analyze whether financial repression can be explained by tax evasion. When calibrated to four Southern European economies, we show that higher degrees of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression as a social optimum. However, a higher degree of tax evasion, due to a lower tax rate, reduces the severity of the financial restriction. In addition, we find the results to be robust across growth models with or without productive public expenditures. The only difference being that the policy parameters in the former case have higher optimal values.

Series title: Working Paper 081
1 May 2008
Journal: 2008, Economic Notes, Review of Banking, Finance and Monetary Economics, 37(2), 141-154
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