This paper presents a theoretical contribution to model and dynamically analyze the underground economy. We build a quarterly DSGE model for the Italian economy with an homogenous good which can be produced by both a sunlight firm and an underground firm. The sunlight firm is subject to distortionary taxation, whereas the underground firm evades taxation. The economy is subject to stochastic uncorrelated technology shocks on total factor productivity on private sectors. The demand side of the economy is populated by an infinite number of house- holds with preferences defined over legal good consumption, public expenditure and labor services on a period-by-period basis. We simulate the model for the Italian economy over the sample 1974:01–2011:02 analyzing the effects of productivity shocks. We find that in Italy GDP share of underground economy is on average about 23 %. The dynamic behavior of the model shows that: (a) sunlight production has a greater relative volatility with respect to underground production, showing a sort of stable “parallel unobserved economic structure” in Italy; (b) all variables of the underground sector appear to be negatively correlated with the corresponding ones of regular economy. This implies that underground activities are a sort of buffer for the economy, whenever the business cycle is in downturn phases.

The Measurement of Underground Economy in ItalyWealth, Income Inequalities, and Demography

Amedeo Argentiero;
2014

Abstract

This paper presents a theoretical contribution to model and dynamically analyze the underground economy. We build a quarterly DSGE model for the Italian economy with an homogenous good which can be produced by both a sunlight firm and an underground firm. The sunlight firm is subject to distortionary taxation, whereas the underground firm evades taxation. The economy is subject to stochastic uncorrelated technology shocks on total factor productivity on private sectors. The demand side of the economy is populated by an infinite number of house- holds with preferences defined over legal good consumption, public expenditure and labor services on a period-by-period basis. We simulate the model for the Italian economy over the sample 1974:01–2011:02 analyzing the effects of productivity shocks. We find that in Italy GDP share of underground economy is on average about 23 %. The dynamic behavior of the model shows that: (a) sunlight production has a greater relative volatility with respect to underground production, showing a sort of stable “parallel unobserved economic structure” in Italy; (b) all variables of the underground sector appear to be negatively correlated with the corresponding ones of regular economy. This implies that underground activities are a sort of buffer for the economy, whenever the business cycle is in downturn phases.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11387/140910
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