08 The Effect of Tax Evasion On Monetary Rule Under Fiscal Dominance and Liquidity Constraint: The Case of Iran

In Iran, due to tax evasion, the government is not able to fully realize its potential tax revenue and usually face budget deficit. On the other hand, the central bank does not have enough independence. In this study, first, the monetary rule was calculated by optimizing the central bank's loss function by considering fiscal dominance and tax evasion. The derived rule responds to government deb in addition to inflation and GDP. Parameters have been calculated in the framework of dynamic stochastic general equilibrium model using Bayesian method based on data 2002-2017. We find that despite the fiscal dominance and liquidity constraints, tax evasion can act as a buffer layer for economic agents against economic shocks like government expenditure, oil revenue and technology but tax evasion is lead to greater volatility of economic variables. As a result, social welfare is decreased stronger while under fiscal dominance and absence of tax evasion, optimal monetary rule is impossible.