Investment Shocks, Tax Evasion and the Consumption Puzzle: A DSGE Analysis with Financial Frictions

This paper contributes to the GDP-consumption comovement 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 comovement puzzle area.