Abstract:
This PhD thesis aims to look at four major issues in political economy and macroeconomics, namely,
tax evasion, spirit of capitalism, globalisation and production structures involving delayed effects of
inputs in dynamic general equilibrium models. These issues are of importance to any economy, but
more so to an emerging economy like South Africa. The thesis will not only aim to obtain optimal
policy responses in the presence of such distortions (deviations from the traditional Neoclassical world),
but will also analyse the effects of these distortions on the growth and welfare of the economy.
The thesis aims to have four separate papers based on dynamic general equilibrium (DGE) models:
The first paper would aim to explain theoretically why tax evasion might depend on the level of
financial development and the inflation rate in the economy. And then, it would try and test whether
our proposed theoretical linkage holds in the data using panel data of 150 countries covering the period
of 1980-2009.
General equilibrium models that include the spirit of capitalism shows a positive relationship between
growth and inflation – something unobserved in the data. The literature has tried to reconcile this
theoretical and empirical mismatch by introducing human capital, cash-in-advance constraints applying
to only specific kind of (non-productive) goods, etc. In the second paper, we, however, aim to show
that a simpler way of achieving the negative inflation–growth relationship would be to introduce a
banking system in the model subjected to cash reserve requirements.
The third paper examines the effect of openness on economic growth, given a human capital accumulation
function that captures the marginal benefit of knowledge spillovers in an economy. Two opposing
effects are highlighted – one a positive effect from the increase in human capital on growth, the other
a negative effect through an increase in seigniorage taxes – that would suggest there is a threshold
value of openness, beyond which the impact of opening the economy even more becomes negative for
economic growth.
The fourth paper would aim to indicate that in the presence of lagged inputs, and especially lagged
capital input, in the production structure of an economy, an inflation targeting country might experience
“chaotic” growth behaviour if the inflation target is set too high.
