Measuring the size of the shadow economy using a dynamic general equilibrium model with trends

Mario Solis-Garcia and Yingtong Xie

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.

Keywords: shadow economy; business cycles; DSGE models (search for similar items in EconPapers)
JEL-codes: E26 E32 O17 (search for similar items in EconPapers)
Date: 2017-01-03, Revised 2017-05-05
New Economics Papers: this item is included in nep-dge, nep-iue and nep-mac
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Related works:
Journal Article: Measuring the size of the shadow economy using a dynamic general equilibrium model with trends (2018)
Working Paper: Measuring the size of the shadow economy using a dynamic general equilibrium model with trends (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:78968

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