Two Cycle Stochastic Growth Model: Underground Economy, Investment Volatility and Taxation

38 Pages Posted: 17 Oct 2001

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Bruno Chiarini

University of Naples, Parthenope

Date Written: April 2001

Abstract

This paper develops a new theoretical framework, introducing into the traditional real business cycle model a second sector, which we interpret as representing the underground economy. We find that a model with an underground sector is quite successful in matching the stylized facts of the business cycle, improving some unsatisfactory results such as the employment volatility puzzle and productivity puzzle. Further, we show that it produces substantial internal propagation of temporary shocks. Then we explain how the underground activity helps to mitigate recessions and the cost of high tax burdens by allowing the household to smooth consumption through a proper labor allocation between the two sectors.

Keywords: Real business cycle, Underground Economy, Investment Volatility, Taxation

JEL Classification: E320, E260, E220, H200

Suggested Citation

Busato, Francesco and Chiarini, Bruno, Two Cycle Stochastic Growth Model: Underground Economy, Investment Volatility and Taxation (April 2001). Available at SSRN: https://ssrn.com/abstract=287176 or http://dx.doi.org/10.2139/ssrn.287176

Francesco Busato (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

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