Tax Evasion And Financial Repression: A Reconsideration Using Endogenous Growth Models

Using two dynamic monetary general equilibrium models characterized by endogenous growth, financial repression and endogenously determined tax evasion, the authors analyze whether financial repression can be explained by tax evasion. When calibrated to four Southern European economies, they show that higher degrees of tax evasion within a country, resulting from a higher level of corruption and a lower penalty rate, yields higher degrees of financial repression as a social optimum. However, a higher degree of tax evasion, due to a lower tax rate, reduces the severity of the financial restriction.