The Unofficial Economy and the Business Cycle: A Test for Theories
AbstractThe shadow economy is an extensive phenomenon worldwide. It poses several questions, the consequences on fluctuations in economic activity being among the major ones. Based on official data, this paper establishes a set of cyclical properties of macroeconomic aggregates and studies how these vary across countries with the size of the unofficial sector. Through comparisons with the existing literature on business cycles in economies featuring underground activities, the obtained ‘stylized facts’ are used to test the relevance of theoretical predictions on the influence of the shadow economy. Using this procedure allows to confirm that the evidence is not entirely of the sort suggested in business cycle models. In particular, some important macro aggregates and cyclical properties have been neglected in the analysis altogether, while others have been paid too much attention for no apparent empirical reason. Some possible avenues for future research can be drawn from this exercise.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2010-17.
Length: 33 pages
Date of creation: Jul 2010
Date of revision:
Publication status: Forthcoming in International Economic Journal
Note: I would like to thank my adviser, Christian Zimmermann, for his comments and motivation. This paper has benefited from suggestions from seminar participants at the University of Connecticut and at the International Workshop Shadow Economy, Tax Policy, and Labour Markets in International Comparison: Options for Economic Policy, University of Potsdam, April 15-16, 2010. All errors are entirely mine. Financial assistance from Universidad de Antioquia is gratefully acknowledged.
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More information through EDIRC
Shadow economy; Business cycles; Model evaluation.;
Other versions of this item:
- 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.
- E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
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