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Underground economy and aggregate fluctuations

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  • 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.

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Bibliographic Info

Article provided by Springer in its journal Spanish Economic Review.

Volume (Year): 3 (2001)
Issue (Month): 1 ()
Pages: 41-53

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Handle: RePEc:spr:specre:v:3:y:2001:i:1:p:41-53

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Related research

Keywords: Participation rate; business cycles; wage premium;

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Cited by:
  1. Catalina Granda-Carvajal, 2010. "The Unofficial Economy and the Business Cycle: A Test for Theories," International Economic Journal, Taylor & Francis Journals, vol. 24(4), pages 573-586.
  2. Busato, Francesco & Chiarini, Bruno & Marchetti, Enrico, 2011. "Indeterminacy, underground activities and tax evasion," Economic Modelling, Elsevier, vol. 28(3), pages 831-844, May.
  3. Silvia Sgherri, 2005. "Long-Run Productivity Shifts and Cyclical Fluctuations," IMF Working Papers 05/228, International Monetary Fund.
  4. Joanna Tyrowicz & Stanisław Cichocki, 2010. "Employed Unemployed? On Shadow Employment During Transition," Working Papers 2010-05, Faculty of Economic Sciences, University of Warsaw.
  5. Elgin, Ceyhun, 2013. "Internet usage and the shadow economy: Evidence from panel data," Economic Systems, Elsevier, vol. 37(1), pages 111-121.
  6. Ceyhun Elgin & Burak R. Uras, 2012. "Public Debt, Sovereign Default Risk and Shadow Economy," Working Papers 2012/10, Bogazici University, Department of Economics.
  7. Amedeo Argentiero & Michele Bagella & Francesco Busato, 2008. "Money laundering in a two-sector model: using theory for measurement," European Journal of Law and Economics, Springer, vol. 26(3), pages 341-359, December.
  8. R. Orsi & D. Raggi & F. Turino, 2012. "Size, Trend, and Policy Implications of the Underground Economy," Working Papers wp818, Dipartimento Scienze Economiche, Universita' di Bologna.
  9. Conesa, Juan Carlos & Diaz-Moreno, Carlos & Galdon-Sanchez, Jose Enrique, 2002. "Explaining cross-country differences in participation rates and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 333-345, February.
  10. Ceyhun Elgin & Friedrich Schneider, 2013. "Shadow Economies in OECD Countries: DGE vs. MIMIC Approaches," Working Papers 2013/13, Bogazici University, Department of Economics.
  11. Francesco Busato & Bruno Chiarini & Enrico Marchetti, 2005. "Fiscal Policy under Indeterminacy and Tax Evasion," Economics Working Papers 2005-09, School of Economics and Management, University of Aarhus.
  12. Maurizio Bovi & Peter Claeys, 2008. "Treasury V Dodgers. A Tale of Fiscal Consolidation and Tax Evasion," ISAE Working Papers 93 Classification-JEL E62, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  13. Jose Maria Serrano & Maria Dolores Gadea, 2005. "What causes the hidden economy in Spain?," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(3), pages 143-150, May.

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