Indeterminacy, Underground Activities and Tax Evasion

University of Aarhus Department of Economics Working Paper No. 2004-11

41 Pages Posted: 8 Feb 2005

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Bruno Chiarini

University of Naples, Parthenope

Enrico Marchetti

University of Rome - La Sapienza

Multiple version iconThere are 2 versions of this paper

Date Written: November 12, 2004

Abstract

This paper shows that underground activities and tax evasion may be another possible source of local indeterminacy of the equilibrium path. We derive necessary and sufficient conditions for equilibrium path to be locally indeterminate under tax evasion and underground activities. Moreover, the explicit introduction of an (even small) underground sector into a one-sector general equilibrium model allow to reduce aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense that slope down). Finally, we show that under indeterminacy, an increase in corporate, labor or income tax rates has a non-Keynesian effect, i.e. the economy enters into an expansionary pattern. These effects are reversed when the steady state is saddle-path stable.

Keywords: Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and underground Activities, Indeterminacy and Sunspots

JEL Classification: E32, E13, E26, O40

Suggested Citation

Busato, Francesco and Chiarini, Bruno and Marchetti, Enrico, Indeterminacy, Underground Activities and Tax Evasion (November 12, 2004). University of Aarhus Department of Economics Working Paper No. 2004-11, Available at SSRN: https://ssrn.com/abstract=664025 or http://dx.doi.org/10.2139/ssrn.664025

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

Enrico Marchetti

University of Rome - La Sapienza ( email )

via del Castro Laurenziano, 9
Rome, RM 00161
Italy

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