 Optimal monetary and audit policy with imperfect taxationMarcelo Arbex and Nurlan Turdaliev Journal of Macroeconomics, 2011, vol. 33, issue 2, 327-340 Abstract: We study optimal monetary and fiscal policy in the presence of informal activities and tax evasion in a cash-and-credit model where identical households are audited to determine their compliance with the tax code. Taxation of informal labor is imperfect, but the government has tools to deal with informal activities and can choose them optimally to reduce fiscal distortions. We characterize both the optimal monetary (optimal interest rate) and fiscal policy (optimal income tax, evasion penalty and audit probability). When auditing is costless, a nominal interest rate equal to zero is optimal and attained when all agents are audited and both types of labor are taxed at the same rate. In the presence of auditing costs, the optimal audit policy does not follow the Friedman rule, and we report the welfare costs of implementing this monetary policy prescription. We derive conditions under which the Friedman rule can be recovered in an economy with informal activities. Keywords: Monetary; and; fiscal; policy; Friedman; rule; Informal; economy; Tax; evasion (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:33:y:2011:i:2:p:327-340 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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