Investment Shocks, Tax Evasion and the Consumption Puzzle: A DSGE Analysis with Financial Frictions
30 Pages Posted: 25 Aug 2016
Date Written: July 2016
This paper contributes to the GDP-consumption co-movement puzzle literature investigating the role of tax evasion in explaining the consumption path after a Marginal Efficiency of Investment shock. We use an otherwise standard medium-scale New Keynesian DSGE model combining tax evasion with financial frictions à la Bernanke, Gertler, Gilchrist (1999). The main result of our paper shows that tax evasion can considerably shrink the GDP-consumption co-movement puzzle area.
Keywords: tax evasion, investment shocks, DSGE modelling, financial frictions, GDP-consumption comovement puzzle
JEL Classification: E220, E320, E440, E510, E620, G100, G210, G300, H200
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