The Unofficial Economy and the Business Cycle: A Test for Theories

Catalina Granda-Carvajal ()

No 2010-17, Working papers from University of Connecticut, Department of Economics

Abstract: The shadow economy is an extensive phenomenon worldwide. It poses several questions, the consequences on fluctuations in economic activity being among the major ones. Based on official data, this paper establishes a set of cyclical properties of macroeconomic aggregates and studies how these vary across countries with the size of the unofficial sector. Through comparisons with the existing literature on business cycles in economies featuring underground activities, the obtained ‘stylized facts’ are used to test the relevance of theoretical predictions on the influence of the shadow economy. Using this procedure allows to confirm that the evidence is not entirely of the sort suggested in business cycle models. In particular, some important macro aggregates and cyclical properties have been neglected in the analysis altogether, while others have been paid too much attention for no apparent empirical reason. Some possible avenues for future research can be drawn from this exercise.

Keywords: Shadow economy; Business cycles; Model evaluation. (search for similar items in EconPapers)
JEL-codes: C52 C82 E26 E32 O17 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2010-07
Note: I would like to thank my adviser, Christian Zimmermann, for his comments and motivation. This paper has benefited from suggestions from seminar participants at the University of Connecticut and at the International Workshop Shadow Economy, Tax Policy, and Labour Markets in International Comparison: Options for Economic Policy, University of Potsdam, April 15-16, 2010. All errors are entirely mine. Financial assistance from Universidad de Antioquia is gratefully acknowledged.
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Citations: View citations in EconPapers (18)

Forthcoming in International Economic Journal

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Journal Article: The Unofficial Economy and the Business Cycle: A Test for Theories (2010)
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