The Impact of Seigniorage Volatility on Underground Economy in Iran: a DSGE Approach

This study investigates the impact of seigniorage volatility as a source of income on underground economy in Iran using a dynamic stochastic general equilibrium models .The first step is to estimate tax revenues from seigniorage and inflation in Iran. Then determine the size of underground economy in Iran. In addition, by considering the variables of the model, two scenarios were examined. The government relies on tax revenues and revenues from the inflation tax or seigniorage revenues by 10 percent. In this scenario, followed by shock of seigniorage income, a decrease in the production of tradable sector, strengthening the non-traded sector, reduce swelling tradable sector, rising inflation and falling real exchange rate in the non-traded sector. In the second scenario assuming 30 percent government revenue from seigniorage. Impulse response functions derived from seigniorage state of shock results in this case show that the tradable sector production decreased while production of non-traded sector will increase. Inflation and domestic production of tradable goods in response to the decline in production in this sector has increased. In money demand elasticity then the seigniorage income-maximizing rate of inflation is 8.6 percent and the money growth rate is 10.8. The results showed that the growth rate of seigniorage and inflation tax increase above the rate of inflation leads to lower tax revenues.