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The shadow economy as an equilibrium outcome

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  • Gomis-Porqueras, Pedro
  • Peralta-Alva, Adrian
  • Waller, Christopher

Abstract

We construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping in some markets—cash. Trade using cash to avoid taxes is the ‘shadow economy’ in our model. We then calibrate our model using money, interest rate and GDP data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates.

Suggested Citation

  • Gomis-Porqueras, Pedro & Peralta-Alva, Adrian & Waller, Christopher, 2014. "The shadow economy as an equilibrium outcome," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 1-19.
    • Handle: RePEc:eee:dyncon:v:41:y:2014:i:c:p:1-19
    DOI: 10.1016/j.jedc.2014.02.006
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    More about this item

    Keywords

    Informal sector; Search; Money; Credit;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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