Underground economy and aggregate fluctuations

Juan Carlos Conesa, Carlos Díaz Moreno () and Jose Galdon-Sanchez ()
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Carlos Díaz Moreno: Universitat de Barcelona and CREB, Departament de Teoria Econòmica, Diagonal, 690, 08034 Barcelona, Spain Universidad de Sevilla, Departamento de Teoría Económica y Econom{ía Política, Ramón y Cajal, s/n - 41018 Sevilla, Spain London School of Economics, Houghton Street, London WC2A 2AE, UK

Spanish Economic Review, 2001, vol. 3, issue 1, 41-53

Abstract: This paper explores the role of underground economic activities as an explanation of differences in registered aggregate fluctuations. In order to do so, we introduce an underground economy sector in an otherwise standard Real Business Cycle model and calibrate it to the USA economy. We find that, at low frequencies, Europe fluctuates more than the USA, while its participation rate is smaller. The existence of underground activities rationalizes the negative relationship between participation rates and fluctuations of registered output. Our model accounts for 44.3% of the differences in aggregate fluctuations between the USA and European economies. Finally, the model generates implied sizes of the underground economy of 3.2% and 7% of the American and European output, respectively, which are in the range of those found in the empirical literature.

Keywords: Participation rate; business cycles; wage premium (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Date: 2001-04-18
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Citations: View citations in EconPapers (33)

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Working Paper: Underground economy and aggregate fluctuations (1997)
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