Abstract:
Using a monetary endogenous growth overlapping generations model characterized by financial repression,
purposeful government expenditures and costly tax enforcement, we analyze whether financial repression
can be explained by the cost involved in raising taxes. Note financial repression is modeled via
high obligatory reserve requirements that banks in the economy need to hold. We show that higher costs
of tax collection produces a monotonic increase in reserve requirements. Moreover, the government tends
to rely more on indirect taxation, compared to direct taxation, as costs of tax collection increases.
