EconPapers    
Economics at your fingertips  
 

A Growth Model of Inflation, Tax Evasion, and Financial Repression

Nouriel Roubini () and Xavier Sala-i-Martin

No 4062, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we study the effects of policies of financial repression on long term growth and try to explain why optimizing governments might want to repress the financial sector. We also explain why inflation may be negatively related to growth, even though it does not affect growth directly. We argue that the main reason why governments repress the financial sector is that this sector is the source of "easy" resources for the public budget The source of revenue stemming from this intervention is modeled through the inflation tax. Our model has the implication that financial development reduces money demand. Hence, if the government allows for financial development the inflation tax base, and the chance to collect seigniorage, is reduced. 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 saving and investment rate and on the growth rate of the economy. We show that 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 steady state rate of growth of the economy. Financial repression will therefore be associated with high tax evasion, low growth and high inflation.

Date: 1992-05
Note: ME EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

Published as Journal of Monetary Economics, 35, pp.275-301, April 1995.

Downloads: (external link)
http://www.nber.org/papers/w4062.pdf (application/pdf)

Related works:
Journal Article: A growth model of inflation, tax evasion, and financial repression (1995) Downloads
Working Paper: A Growth Model of Inflation, Tax Evasion and Financial Repression (1992)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4062

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4062

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-31
Handle: RePEc:nbr:nberwo:4062