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Using Theory for Measurement: An Analysis of the Behaviour of the Underground Economy

Research output: Working paperResearch

  • Francesco Busato, Denmark
  • Bruno Chiarini, University of Naples, Italy
  • Vincenzo di Maro, University College of London, United Kingdom
  • Afdeling for Nationaløkonomi
This paper generates high frequency data for the underground laborand the underground production using a theoretical general equilibriummodel, over the sample 1970:01-1992:04 (32 years; 128 observations). Wecompare selected time series properties of the generated series with thoseof the corresponding series estimated with classical methodologies. Thegenerated series for underground labor and underground production present awider range and are more volatile than all other series estimated withclassical methodologies. The analysis, next, suggests that the undergroundlabor is pro-cyclical with respect to the GDP, that is lagging it byapproximately one quarter, and that underground labor series generated fromthe theoretical model are highly persistent. Finally, the estimatedcorrelation between the cyclical component of our generated-from-theoryunderground labor productivity and the actual series of aggregate GDP isnegative (-0.34), while official yearly estimates present a positive (butvery low) correlation with the cyclical component of GDP (0.12). Thissuggests that the underground sector has a positive impact over theproductivity at the business cycle frequency, while it dampens productivityfluctuations at a lower frequency.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages30
Publication statusPublished - 2005

    Research areas

  • Real Business Cycle Models, Underground Economy

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ID: 191545