Essay on tax enforcement, optimal monetary policy and labor supply

This dissertation is comprised of essays on three topics, tax enforcement, monetary policy and labor supply. The main objective of the first two essays is to explore the interaction with and consequences of tax enforcement policies on monetary policy. In an economy with a complete but costly set of tax instruments, agents may evade taxes by working in an informal sector, but they are detected with positive probability. The government has carrot (benefit) and stick (evasion penalty) policies. The government spends resources collecting taxes and enforcing the tax code. Deviations from the Friedman rule can occur when tax collection is costly and agents have the opportunity to evade taxes. When the enforcement technology is decreasing in the evasion penalty and penalties are very high, but bounded, the Friedman rule is optimal.; In the second essay I focus on demonstrating that when collecting taxes is costly, the optimal inflation rate is positive and inflation becomes a second best tax. Using U.S. data, I compute the quantitative effect on inflation and interest rates of evasion penalties and government provided benefits to workers in the formal sector for OECD countries. Since no data are available on the amount spent to collect taxes from the informal sector, I also provide an upper bound estimate for OECD countries. This model casts doubt on the desirability and sustainability of the recent convergence in interest rates and inflation in OECD countries. Eurozone countries have coordinated their monetary policies, but they lack of fiscal policy coordination. The model clearly indicates that if countries have different tax enforcement policies and enforcement spending, then the optimal interest rate and inflation will also be different.; The third essay investigates the role played by tax enforcement policies in explaining labor supply behavior. Tax distortions can be offset by informal activities because households can substitute from market work into informal or non-taxed work. The formal sector TFP plays an important role in explaining agents' time allocation. Informal activities and tax enforcement policies can potentially explain the pattern of market work and tax rates in OECD countries; this has important welfare implications.