This paper introduces underground activities and tax evasion into a one sector dynamic general equilibrium model with external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is triggered by the reallocation of resources to the underground sector to...

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...

This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. There are three main results. (i) The underground sector mitigates the distortionary impact of fiscal policies, while...

Macroeconomic models that omit the shadow economy systematically mis-forecast and mis-measure the effect of fiscal –in particular tax– policy on economic activity and tax revenue. We add an informal sector to the Bank of Greece DSGE model and use the actual package of fiscal consolidation...

Fiscal consolidation literature often neglects that there are economies with a sizable underground sector and that most of time it is accounted in GDP statistics. This produces non negligible effects on fiscal multipliers. This paper explores a fiscal consolidation plan calling for a downsizing...