Equilibrium Implications of Fiscal Policy with Tax Evasion

Posted: 23 Jun 2008

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Bruno Chiarini

University of Naples, Parthenope

Guido Rey

University of Rome III - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 23, 2004

Abstract

This paper studies equilibrium effects of fiscal policy disturbances 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 lessening the drop (and the rise) of aggregate production after restrictive (expansionary) tax shocks. (ii) Tax evasion and underground economy can rationalize expansionary response to contractionary fiscal policies; (iii) A dynamic general equilibrium with tax evasion gives a rational justification for a variant of the Laffer curve.

Keywords: Two-sector Dynamic General Equilibrium Models, Fiscal Policy, Tax Evasion and Underground Activities

JEL Classification: E320, E13, H200, E260

Suggested Citation

Busato, Francesco and Chiarini, Bruno and Rey, Guido, Equilibrium Implications of Fiscal Policy with Tax Evasion (March 23, 2004). Available at SSRN: https://ssrn.com/abstract=1147597

Francesco Busato (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

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DK-8000 Aarhus C
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Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Guido Rey

University of Rome III - Department of Economics ( email )

via Ostiense, 139
Rome, 00154
Italy

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