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The shadow economy as an equilibrium outcome

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  • Gomis-Porqueras, Pedro
  • Peralta-Alva, Adrian
  • Waller, Christopher

Abstract

We construct a dynamic general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping in some markets—cash. Trade using cash to avoid taxes is the ‘shadow economy’ in our model. We then calibrate our model using money, interest rate and GDP data to back out the size of the shadow economy for a sample of countries and compare our measures to traditional reduced form estimates.

Suggested Citation

  • Gomis-Porqueras, Pedro & Peralta-Alva, Adrian & Waller, Christopher, 2014. "The shadow economy as an equilibrium outcome," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 1-19.
  • Handle: RePEc:eee:dyncon:v:41:y:2014:i:c:p:1-19
    DOI: 10.1016/j.jedc.2014.02.006
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    References listed on IDEAS

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    12. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
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    Citations

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    Cited by:

    1. Gerasimos T. Soldatos, 2016. "An Anti-Austerity Policy Recipe Against Debt Accumulation in the Presence of Hidden Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(2), pages 90-99, February.
    2. Pablo N. D’Erasmo, 2016. "Access to Credit and the Size of the Formal Sector," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 143-199, April.
    3. Solis-Garcia, Mario & Xie, Yingtong, 2018. "Measuring the size of the shadow economy using a dynamic general equilibrium model with trends," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 258-275.
    4. Christopher J. Waller, 2015. "Microfoundations of Money: Why They Matter," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 289-301.
    5. Chatterjee, Santanu & Turnovsky, Stephen J., 2018. "Remittances and the informal economy," Journal of Development Economics, Elsevier, vol. 133(C), pages 66-83.
    6. Mohammed Aït Lahcen, 2017. "Informality and the long run Phillips curve," ECON - Working Papers 248, Department of Economics - University of Zurich, revised Dec 2018.
    7. Ceyhun Elgin & Ferda Erturk, 2019. "Informal economies around the world: measures, determinants and consequences," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 9(2), pages 221-237, June.
    8. Shami, Labib, 2019. "Dynamic monetary equilibrium with a Non-Observed Economy and Shapley and Shubik’s price mechanism," Journal of Macroeconomics, Elsevier, vol. 62(C).
    9. Anbarci, Nejat & Gomis-Porqueras, Pedro & Marcus, Pivato, 2012. "Formal and informal markets: A strategic and evolutionary perspective," MPRA Paper 42513, University Library of Munich, Germany.
    10. Nejat Anbarci & Pedro Gomis-Porqueras & Marcus Pivato, 2018. "Evolutionary stability of bargaining and price posting: implications for formal and informal activities," Journal of Evolutionary Economics, Springer, vol. 28(2), pages 365-397, April.
    11. Liang Wang & Randall Wright & Lucy Qian Liu, 2020. "Sticky Prices And Costly Credit," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(1), pages 37-70, February.
    12. Abdel-Latif, Hany & Ouattara, Bazoumana & Murphy, Phil, 2017. "Catching the mirage: The shadow impact of financial crises," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 61-70.
    13. Paola Boel & Christopher J. Waller, 2020. "On the Essentiality of Credit and Banking at the Friedman Rule," Working Papers 2020-018, Federal Reserve Bank of St. Louis.
    14. Solis-Garcia, Mario & Xie, Yingtong, 2017. "Is GDP more volatile in developing countries after taking the shadow economy into account? Evidence from Latin America," MPRA Paper 78965, University Library of Munich, Germany.
    15. Waknis, Parag, 2019. "Demonetization as a Payments System Shock under Goods and Financial Market Segmentation: A Short Run Analysis," MPRA Paper 94171, University Library of Munich, Germany.
    16. Soldatos, Gerasimos T., 2015. "An Anti-Austerity Policy Recipe against Debt Accumulation in the Presence of Hidden Economy," MPRA Paper 69911, University Library of Munich, Germany.

    More about this item

    Keywords

    Informal sector; Search; Money; Credit;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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