Macroeconomic volatility: The role of the informal economy

Paulina Restrepo-Echavarria

European Economic Review, 2014, vol. 70, issue C, 454-469

Abstract: Many countries have a large informal economy that is poorly measured in the national accounts. I develop a two-sector small open economy business cycle model where one sector is formal and the other is informal, and explore the effect that the informal sector has on measured business cycles. I show that if the informal economy is poorly measured, the model can generate a volatility of measured consumption that is higher than that of output, as observed in many developing countries and some developed countries, even though actual consumption is not nearly as volatile. My results illustrate the importance of the informal sector and its mis-measurement in understanding measured cyclical fluctuations.

Keywords: Informal economy; Business cycles; Relative volatility; Mis-measurement; Calibration (search for similar items in EconPapers)
JEL-codes: E01 E26 E32 E41 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:70:y:2014:i:c:p:454-469

DOI: 10.1016/j.euroecorev.2014.06.012

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