Ahiabu, Stephen (2006): Inflation and the underground economy.
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This paper studies the optimal rate of seigniorage in an economy characterized by bilateral trade and a tax-evading underground sector. Optimal inflation depends on which sector, formal or underground, is more congested with buyers. If the underground sector is more congested, the optimal inflation rate in Peru is about 42.69% per annum. This offers a possible motivation for the high rates of inflation observed in that country in the 1980s. A policy that returns this economy to Friedman rule delivers a welfare loss that is equivalent to a 14% drop in consumption for the representative household. If the formal sector is more congested however, optimal inflation falls to 1.48%, close to the rate observed in 2005.
|Item Type:||MPRA Paper|
|Institution:||University of Toronto|
|Original Title:||Inflation and the underground economy|
|Keywords:||Inflation; Market Congestion; Ramsey Equilibrium; Underground Economy|
|Subjects:||H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
E - Macroeconomics and Monetary Economics > E2 - Macroeconomics: Consumption, Saving, Production, Employment, and Investment > E26 - Informal Economy; Underground Economy
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook
|Depositing User:||Stephen Ahiabu|
|Date Deposited:||08. Feb 2007|
|Last Modified:||16. Feb 2013 03:19|
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Inflation and the underground economy. (deposited 10. Nov 2006)
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