Can We Rely Upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Percent (or More) of GDP?

Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No.1

59 Pages Posted: 1 Apr 2012 Last revised: 31 Jul 2012

See all articles by Raffaella Basile

Raffaella Basile

Ministry of Economy and Finance, Department of the Treasury, Economic and Financial Analysis and Planning Directorate

Bruno Chiarini

University of Naples, Parthenope

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES)

Date Written: March 28, 2012

Abstract

This paper analyzes the effects of fiscal policy in Italy by employing a database containing two statistical novelties: quarterly fiscal variables on accrual basis and a time series estimate of tax evasion for the period 1981:1-2006:4. Following Revenue Agency suggestions, we use in a VECM the time series of the concealed VAT base as a proxy for the size of “unreported production”, and define a regular GDP measure constructed as GDP net of government expenditure and evaded VAT base. The results reveal that we cannot rely upon the estimates of fiscal policy multipliers in countries with a sizeable unreported production unless the dynamics of the hidden and regular components of the GDP are disentangled. Changes in public spending and the tax rate generate a reallocation from underground to the regular economy which contributes to obscure the spending and tax effect on total GDP. In this setup the spending multiplier shows large long-run effects, considerably stronger than those registered in a model with no attention paid to unreported production. The drop in regular output, after an increase in the effective tax rate, tends to be considerable after one year, producing long-lasting effects and a significant increase in unreported production and tax evasion.

Keywords: fiscal policy, VECM, fiscal multipliers, unreported GDP, tax ratio, effective tax rate

JEL Classification: C32, E62, H26, H62

Suggested Citation

Basile, Raffaella and Chiarini, Bruno and Marzano, Elisabetta, Can We Rely Upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Percent (or More) of GDP? (March 28, 2012). Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No.1, Available at SSRN: https://ssrn.com/abstract=2030709

Raffaella Basile (Contact Author)

Ministry of Economy and Finance, Department of the Treasury, Economic and Financial Analysis and Planning Directorate ( email )

Via XX Settembre 97
Rome, Rome 00187
Italy

HOME PAGE: http://www.dt.mef.gov.it/it/analisi_programmazione_economico_finanziaria/index.html

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES) ( email )

via Medina 40
Naples, 80133
Italy

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