Shadow economies at times of banking crises: Empirics and theory

Emilio Colombo, Luisanna Onnis and Patrizio Tirelli

Journal of Banking & Finance, 2016, vol. 62, issue C, 180-190

Abstract: This paper investigates the response of the shadow economy to banking crises. Our empirical analysis, based on a large sample of countries, suggests that the informal sector is a powerful buffer, which expands at times of banking crises and absorbs a large proportion of the fall in official output. To rationalise our evidence, we build a dynamic stochastic general equilibrium model which accounts for financial and labour market frictions and for nominal rigidities. In line with the empirical literature on the shadow economy, we assume that in the informal sector access to external finance is limited, and the production technology is relatively more labour intensive. Following a banking shock in the official sector, the model predicts a large negative transmission to the unofficial economy that substantially dampens the overall effect of the shock.

Keywords: Financial crises; Shadow economy; DSGE models (search for similar items in EconPapers)
JEL-codes: E26 E32 E44 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Working Paper: Shadow economies at times of banking crises: empirics and theory (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:62:y:2016:i:c:p:180-190

DOI: 10.1016/j.jbankfin.2014.09.017

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