Dr. Heiner Mikosch - Seminar Presentation

Prof. Young Sik Kim

Date and Time: December 16th, 2016, 10:00 - 11:30 am

Room: A 101 in the Economics Building (Museum)

Abstract

The use of money for tax evasion in the self-employed sector is characterized as an equilibrium outcome in the model economy where the self-employed sector´s output is a natural credit good and all the economic activities are costlessly monitored by the government, except those involving cash in the self-employed sector and all the other cash purchases.

As long as the cash-good sector is sufficiently large relative to the self-employed sector and the after tax nominal interest rate is low relative to the labor tax rate, agents choose cash sales to evade labor tax in the self-employed sector and use the income for expenditure on cash goods next period. Optimal monetary policy implies a positive nominal interest rate since Friedman (1969)´s prescription of a zero nominal interest rate distorts allocation in favor of the self-employed sector which encourages tax evasion. Calibrations of the model economy yield that, when the cash held for tax evasion is 10 percent of the cash-good purchases, optimal policy implies the quarterly nominal interest rate of 7.6%.

About the speaker

Prof. Young Sik Kim is Professor at the Seoul National University. His research interests are macroeconomics, monetary economics and financial intermediation. He received his PhD from the University of Iowa in 1994.