Abstract:
We provide an alternative theoretical explanation to the tax evasion-inflation relationship by endogenizing the discount factor in an overlapping generations economy. When the discount factor is a positive function of public expenditure, i.e., discounting is endogenous, then an increase in inflation leads to an increase seigniorage, and hence the discount factor via the rise in public expenditure. In consequence, old age consumption increases in importance such that tax evasion among young-age agents increases to enhance the interest income from savings.
