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FISCAL POLICY WITH AN INFORMAL SECTOR

 

 

Harris Dellas

University of Bern

 

Dimitris Malliaropulos

Bank of Greece

 

Dimitris Papageorgiou

Bank of Greece

 

Evangelia Vourvachaki

Bank of Greece

 

 

Abstract

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 implemented in Greece over the period 2010–2015 to evaluate the role of the black economy. In the data, official Greek GDP declined by about 26%, budget deficits proved larger and more persistent and tax rates increased by much more and tax revenue by much less than predicted. The model replicates the official output decline but implies a true output decline that is less than two thirds of that in recorded output. The discrepancy is even more pronounced for employment. The model also implies that the size of fiscal adjustment and the drop in economic activity could have been considerably milder had the informal sector been curtailed (it instead increased by about 50%). The underground economy seems to have been a key factor in Greece’s failure to achieve orderly debt consolidation while avoiding economic depression.

 

JEL-classification: E26, E32, E62, E65, H26, H68

 

Keywords: Shadow economy, fiscal consolidation, multipliers, tax revenue, true output

 

Acknowledgement: This study was conducted under the Bank of Greece's programme of cooperation with universities. We want to thank George-Marios Angeletos, Heather Gibson, George Tavlas as well as participants in seminars at the Bank of Greece, University of Liverpool and the University of Vienna for valuable comments.  The views expressed in this article are those of the authors and do not necessarily reflect those of the Bank of Greece. Any errors or omissions are the responsibility of the authors.

 

 

Correspondence:


Harris Dellas
University of Bern
Shanzeneckstr 1,
3012 Bern,
Switzerland,
Email: harris.dellas@vwi.unibe.ch


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