Fiscal Policy with an Informal Sector

Harris Dellas (), Dimitrios Malliaropulos, Dimitris Papageorgiou and Evangelia Vourvachaki ()

No 12494, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Macroeconomic models that omit the shadow economy systematically mis-forecast and mis-measure the effect of fiscal - in particular tax- policy on economic activity and tax revenue. We add an informal sector to the Bank of Greece DSGE model and use the actual package of fiscal consolidation implemented in Greece over the period 2010-2015 to evaluate the role of the black economy. In the data, official Greek GDP declined by about 26%, budget deficits proved larger and more persistent and tax rates increased by much more and tax revenue by much less than predicted. The model replicates the official output decline but implies a true output decline that is less than two thirds of that in recorded output. The discrepancy is even more pronounced for employment. The model also implies that the size of fiscal adjustment and the drop in economic activity could have been considerably milder had the informal sector been curtailed (it instead increased by about 50%). The underground economy seems to have been a key factor in Greece's failure to achieve orderly debt consolidation while avoiding economic depression.

Keywords: Shadow; economy (search for similar items in EconPapers)
JEL-codes: E26 E32 E62 E65 H26 H68 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
https://cepr.org/publications/DP12494 (application/pdf)

Related works:
Journal Article: Fiscal policy with an informal sector (2024)
Working Paper: Fiscal policy with an informal sector (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12494

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP12494

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().