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Abstract

The 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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File URL: http://www.econ.uconn.edu/working/2010-17.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2010-17.

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Length: 33 pages
Date of creation: Jul 2010
Date of revision:
Publication status: Forthcoming in International Economic Journal
Handle: RePEc:uct:uconnp:2010-17

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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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
Phone: (860) 486-4889
Fax: (860) 486-4463
Web page: http://www.econ.uconn.edu/
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Related research

Keywords: Shadow economy; Business cycles; Model evaluation.;

Other versions of this item:

Find related papers by JEL classification:

• E26 - Macroeconomics and Monetary Economics - - Macroeconomics: 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
• C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

References

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1. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
2. 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.
3. Juan Carlos Conesa & Carlos Diaz Moreno & Jose Enrique Galdon Sanchez, 1997. "Underground economy and aggregate fluctuations," Working Papers in Economics 17, Universitat de Barcelona. Espai de Recerca en Economia.
   
   • Juan Carlos Conesa Roca & Carlos Díaz Moreno & José Enrique Galdón Sánchez, 2001. "Underground economy and aggregate fluctuations," Spanish Economic Review, Springer, vol. 3(1), pages 41-53.
4. Christopher Bajada, 2003. "Business Cycle Properties of the Legitimate and Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 79(247), pages 397-411, December.
5. David E. A. Giles, 1998. "Measuring The Hidden Economy: Implications for Econometric Modelling," Econometrics Working Papers 9809, Department of Economics, University of Victoria.
   
   • Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages F370-80, June.
6. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
7. Bosch, Mariano & Maloney, William F., 2008. "Cyclical Movements in Unemployment and Informality in Developing Countries," IZA Discussion Papers 3514, Institute for the Study of Labor (IZA).
   
   • Bosch, Mariano & Maloney, William, 2008. "Cyclical movements in unemployment and informality in developing countries," Policy Research Working Paper Series 4648, The World Bank.
8. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
9. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
   
   • Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
10. Mariano Bosch & Julen Esteban-Pretel, 2009. "Cyclical Informality and Unemployment," CIRJE F-Series CIRJE-F-613, CIRJE, Faculty of Economics, University of Tokyo.
11. Fiorito, Riccardo & Kollintzas, Tryphon, 1992. "Stylized Facts of Business Cycles in the G7 from a Real Business Cycles Perspective," CEPR Discussion Papers 681, C.E.P.R. Discussion Papers.
    
    • Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February.
12. repec:ebl:ecbull:v:3:y:2008:i:58:p:1-10 is not listed on IDEAS
13. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2010. "Informal self-employment and macroeconomic fluctuations," Journal of Development Economics, Elsevier, vol. 91(2), pages 211-226, March.
14. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May.
15. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries - Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
    
    • Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-85, May.

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Cited by:

1. Catalina Granda-Carvajal, 2011. "Macroeconomic Implications of the Underground Sector: Challenging the Double Business Cycle Approach," Working papers 2011-14, University of Connecticut, Department of Economics.
   
   • Catalina Granda-Carvajal, 2012. "Macroeconomic Implications of the Underground Sector: Challenging the Double Business Cycle Approach," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 42(2), pages 237-256, September.

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