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Macroeconomic Implications of the Underground Sector: Challenging the Double Business Cycle Approach

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  • Catalina Granda-Carvajal

    (University of Connecticut and Universidad de Antioquia)

Abstract

Within the literature on business cycles featuring shadow economic activities, there is an approach based on the arguable premise that fluctuations in the official and unofficial sectors are negatively correlated. The present paper develops a real business cycle model that does not impose such an assumption. To do so, preferences are characterized so that regular and irregular labor are additively separable. Furthermore, leisure time is spent on both irregular work effort and non-market activities. Simulations are conducted to examine the performance of the model economy and to compare the resulting cyclical features with related empirical findings. In addition, computational experiments allow to analyze the effects of different tax structures, enforcement rates and tastes for irregular labor on the volatility and comovements of aggregate variables. These simulations and experiments overall offer a more comprehensive view of the cyclical implications of the shadow economy.

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Bibliographic Info

Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2011-14.

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Length: 58 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:uct:uconnp:2011-14

Note: I am greatly indebted to my adviser, Christian Zimmermann, for his valuable comments and support. Also, I would like to thank seminar participants at the University of Connecticut. Any errors are entirely mine.
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Keywords: Underground economy; shadow economy; business cycles; dynamic stochastic general equilibrium models;

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  2. Lacroix, Guy & Fortin, Bernard, 1992. "Utility-Based Estimation of Labour Supply Functions in the Regular and Irregular Sectors," Economic Journal, Royal Economic Society, vol. 102(415), pages 1407-22, November.
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  15. Catalina Granda-Carvajal, 2010. "The Unofficial Economy and the Business Cycle: A Test for Theories," Working papers 2010-17, University of Connecticut, Department of Economics.
  16. Cho, J-O. & Cooley, T.F., 1988. "Employment And Hours Over The Business Cycle," Papers 88-03, Rochester, Business - General.
  17. Giles, David E A, 1997. "Testing for Asymmetry in the Measured and Underground Business Cycles in New Zealand," The Economic Record, The Economic Society of Australia, vol. 73(222), pages 225-32, September.
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  20. Graversen, Ebbe Krogh & Smith, Nina, 2002. "Tax Evasion and Work in the Underground Sector," CLS Working Papers 01-2, University of Aarhus, Aarhus School of Business, Centre for Labour Market and Social Research.
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