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UNDERGROUND ECONOMY AND FISCAL POLICIES MODELING*

Lucian Albu

Working Papers of Institute for Economic Forecasting from Institute for Economic Forecasting

Abstract: Over the last decades a growing concern over the phenomenon of the underground economy has increased attention among officials, politicians, and economists. There are several important reasons why officials and the general public should be concerned in post-communist countries about the real size of the underground economy, as following: an impressive development of underground economy occurred after the collapse of former communist regimes and general liberalization of economic activity; under a growing underground economy, macroeconomics policy is based on mistaken official indicators (such as: income, consumption, unemployment, etc.). In such situation, an extended underground sector may cause severe difficulties to politicians, because it "provides” unreliable official indicators; an accelerated increase in the size of the underground economy, usually caused by a rise in the overall burden of taxes and regulations, may lead to an erosion of the tax base, a decrease in tax receipts and thus to a further rise of the budget deficit (in case of Eastern countries, these are perhaps accentuated due to a weak government bonds market and of a high inflation). First part of this study deals with a critical survey of main approaches of underground (informal) sector in specialized literature; second part focuses on models existing in literature, on their comparative estimating results of the size of underground economy and evaluation of fiscal policy effects. Also, some our results obtained by using specific models to investigate problems of underground economy in East European countries are presented. * This research was undertaken with support from the European Commission's Phare ACE Programme 1994, Contract Number: 94-0139-F.

Keywords: underground economy; Laffer curve; informal activity; fiscal policy; transition (search for similar items in EconPapers)
JEL-codes: E26 P26 H26 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2007-12
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