The informal economy and business cycles
A vast literature has focused on what causes businesses to move into informality and what is the impact of an enlarging informal sector on growth. This paper shows that the size of the informal economy also affects business cycle volatility. Informal businesses are usually small in size, which not only prevents them from achieving economies of scale and from operating with the right capital/labor mix, but also restricts their access to credit markets. Because firms operating informally lack access to credit markets to neutralize the cash flow squeeze arising during recessions, they are more exposed to fluctuations in economic activity and more likely to fail. Using a Generalized Method of Moments methodology, this paper shows that countries with larger informal economies tend to undergo increased volatility in output, investment and consumption over the business cycle.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 11 (2008)
Issue (Month): (May)
|Contact details of provider:|| Postal: Av. Córdoba 374, (C1054AAP) Capital Federal|
Phone: (5411) 6314-3000
Fax: (5411) 4314-1654
Web page: http://www.cema.edu.ar/publicaciones/jae.html
More information through EDIRC