Orsi, Renzo, Raggi, Davide, Turino, Francesco
Size, trend, and policy implications of the underground economy
Review of Economic Dynamics. 2014, 17(3): 417-436. doi:10.1016/j.red.2013.11.001
URI: http://hdl.handle.net/10045/51692
DOI: 10.1016/j.red.2013.11.001
ISSN: 1094-2025 (Print)
Abstract: 
We study the underground economy within a dynamic and stochastic general equilibrium framework. Our model combines limited tax enforcement with an otherwise standard two-sector neoclassical stochastic growth model. The Bayesian estimation of the model based on Italian data provides evidence in favor of an important underground sector in Italy, with a size that has increased steadily over the whole sample period. We show that this pattern is due to a steady increase in taxation. Fiscal policy experiments suggest that a moderate tax cut, along with a stronger effort in the monitoring process, causes a sizeable reduction in the size of the underground economy and provides a positive stimulus for the regular economy. Both of these effects jointly increase total fiscal revenues.
Keywords:DSGE, Underground economy, Tax evasion, Bayesian estimation, Italy
Elsevier
info:eu-repo/semantics/article