Financing Government Expenditures Optimally

Pinar Yesin

No 06.01, Working Papers from Swiss National Bank, Study Center Gerzensee

Abstract: 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.

Pages: 35 pages
Date: 2006-01
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-pbe
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