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

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.

Noncompliant behaviors in general equilibrium: A survey

“…The authors argue that the documented countercyclicality also explains why total employment in Mexico displays lower cyclicality and variability relative to Canada, which is a developed economy. A different thesis is proposed by Granda-Carvajal (2012), investigating the cyclical implications of the underground economy in the presence of productivity and fiscal policy shocks. She develops an RBC model without the countercyclicality assumption, criticizing Busato and Chiarini (2004) and arguing that dynamics for the market and underground sector are ex ante imposed and not endogenously delivered by the model economy.…”

“…This paper aims to survey DGE articles with NCBs along five dimensions that are importantly affected by NCBs and that continue the macroeconomic debate: business cycle, macroeconomic policies, labor market, income inequality, and financial factors. First, relative to the business cycle, the macroeconomic implications of the existence of NCBs turn out to be relevant since NCBs do affect the cyclical properties of macro-aggregates (Granda-Carvajal, 2012). Second, policy makers constantly look for more appropriate macroeconomic policies that might help to manage NCBs.…”

The Fiscal Institutions of Tomorrow

“…In general, these special regimes collect only a small percentage of total tax revenue, which varies between 0.1 percent of total revenue in Bolivia and more than 6 percent in Brazil (Arias, 2009). Although these systems have increased the number of formal companies in some countries, they have also encouraged the phenomenon of "fiscal dwarfism" whereby entrepreneurs use diverse strategies to stay small and thus avoid paying more taxes (Chong, Guillén, and Ríos, 2009;McKenzie, 2009;Granda-Carvajal, 2011). 12 In general, fiscal policies, or others, that lack progressivity tend to produce these "border effects."…”

Las instituciones fiscales del mañana

“…En general, estos regímenes especiales recaudan un porcentaje pequeño de los impuestos totales, que varía entre el 0,1% de la recaudación total en Bolivia y más del 6% en Brasil (Arias, 2009). Aunque estos sistemas han incrementado en algunos países el número de empresas formales, también han incentivado el fenómeno del "enanismo fiscal", o el uso de distintas estrategias por parte de las empresas para permanecer pequeñas y evitar mayores impuestos (Chong, Guillén y Ríos, 2009;McKenzie, 2009;Granda-Carvajal, 2011). 12 En general, las políticas fiscales (o de otro tipo) sin fases de entrada y salida progresivas suelen producir "efectos frontera¨.…”