Can we rely upon fiscal policy estimates in countries with unreported production of 15 per cent (or more) of GDP?

Raffaella Basile, Bruno Chiarini and Elisabetta Marzano

No 1, Working Papers from Department of the Treasury, Ministry of the Economy and of Finance

Abstract: This paper analyzes the effects of fiscal policy in Italy by employing a database containing two statistical novelties: quarterly fiscal variables on accrual basis and a time series estimate of tax evasion for the period 1981:1-2006:4. Following Revenue Agency suggestions, we use in a VECM the time series of the concealed VAT base as a proxy for the size of “unreported production”, and define a regular GDP measure constructed as GDP net of government expenditure and evaded VAT base. The results reveal that we cannot rely upon the estimates of fiscal policy multipliers in countries with a sizeable unreported production unless the dynamics of the hidden and regular components of the GDP are disentangled. Changes in public spending and the tax rate generate a reallocation from underground to the regular economy which contributes to obscure the spending and tax effect on total GDP. In this setup the spending multiplier shows large long-run effects, considerably stronger than those registered in a model with no attention paid to unreported production. The drop in regular output, after an increase in the effective tax rate, tends to be considerable after one year, producing long-lasting effects and a significant increase in unreported production and tax evasion.

Keywords: Fiscal policy; VECM; fiscal multipliers; unreported GDP; tax ratio; effective tax rate. (search for similar items in EconPapers)
JEL-codes: C32 E62 H26 H62 (search for similar items in EconPapers)
Pages: 56
Date: 2012-03
New Economics Papers: this item is included in nep-acc, nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP? (2011)
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