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Underground economy and aggregate fluctuations

Author

Listed:
  • Juan Carlos Conesa Roca

    (Universitat de Barcelona and CREB, Departament de Teoria Econòmica, Diagonal, 690, 08034 Barcelona, Spain Universidad de Sevilla, Departamento de Teoría Económica y Econom{ía Política, Ramón y Cajal, s/n - 41018 Sevilla, Spain London School of Economics, Houghton Street, London WC2A 2AE, UK)

  • Carlos Díaz Moreno

    (Universitat de Barcelona and CREB, Departament de Teoria Econòmica, Diagonal, 690, 08034 Barcelona, Spain Universidad de Sevilla, Departamento de Teoría Económica y Econom{ía Política, Ramón y Cajal, s/n - 41018 Sevilla, Spain London School of Economics, Houghton Street, London WC2A 2AE, UK)

  • José Enrique Galdón Sánchez

    (Universitat de Barcelona and CREB, Departament de Teoria Econòmica, Diagonal, 690, 08034 Barcelona, Spain Universidad de Sevilla, Departamento de Teoría Económica y Econom{ía Política, Ramón y Cajal, s/n - 41018 Sevilla, Spain London School of Economics, Houghton Street, London WC2A 2AE, UK)

Abstract

This paper explores the role of underground economic activities as an explanation of differences in registered aggregate fluctuations. In order to do so, we introduce an underground economy sector in an otherwise standard Real Business Cycle model and calibrate it to the USA economy. We find that, at low frequencies, Europe fluctuates more than the USA, while its participation rate is smaller. The existence of underground activities rationalizes the negative relationship between participation rates and fluctuations of registered output. Our model accounts for 44.3% of the differences in aggregate fluctuations between the USA and European economies. Finally, the model generates implied sizes of the underground economy of 3.2% and 7% of the American and European output, respectively, which are in the range of those found in the empirical literature.

Suggested Citation

  • Juan Carlos Conesa Roca & Carlos Díaz Moreno & José Enrique Galdón Sánchez, 2001. "Underground economy and aggregate fluctuations," Spanish Economic Review, Springer;Spanish Economic Association, vol. 3(1), pages 41-53.
    • Handle: RePEc:spr:specre:v:3:y:2001:i:1:p:41-53
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    Keywords

    Participation rate; business cycles; wage premium;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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