Credit Channel and Business Cycle: The Role of Tax Evasion

22 Pages Posted: 27 Sep 2018

See all articles by Bruno Chiarini

Bruno Chiarini

University of Naples, Parthenope

Maria Ferrara

Università degli Studi di Napoli “Parthenope”

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES)

Date Written: August 02, 2018

Abstract

This paper examines the role of tax evasion in explaining the business cycle in a DSGE model with a financial accelerator. For this purpose, we assume that financially constrained agents are tax evaders, taking advantage of an additional margin of flexibility in coping with adverse shocks. In this setting, we simulate a risk shock that propagates its effects in the credit channel via the financial accelerator mechanism. The results show that tax evasion is pro cyclical and strengthens the effects of the financial accelerator. Unlike the standard literature, in which tax evasion cushions business cycle fluctuations, here we find that it amplifies macroeconomic fluctuations considerably.

Keywords: tax evasion, financial accelerator, business cycle, risk shocks, DSGE modeling

JEL Classification: E320, E440, H260

Suggested Citation

Chiarini, Bruno and Ferrara, Maria and Marzano, Elisabetta, Credit Channel and Business Cycle: The Role of Tax Evasion (August 02, 2018). CESifo Working Paper Series No. 7169, Available at SSRN: https://ssrn.com/abstract=3251707

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Maria Ferrara

Università degli Studi di Napoli “Parthenope” ( email )

Naples
Italy

Elisabetta Marzano (Contact Author)

University of Naples Parthenope - Department of Economic Studies (DES) ( email )

via Medina 40
Naples, 80133
Italy

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