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Credit Channel and Business Cycle: The Role of Tax Evasion

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Listed:
  • Bruno Chiarini
  • Maria Ferrara
  • Elisabetta Marzano

Abstract

This paper examines the role of tax evasion in explaining the business cycle in a DSGE model with a financial accelerator. For this purpose, we assume that financially constrained agents are tax evaders, taking advantage of an additional margin of flexibility in coping with adverse shocks. In this setting, we simulate a risk shock that propagates its effects in the credit channel via the financial accelerator mechanism. The results show that tax evasion is pro cyclical and strengthens the effects of the financial accelerator. Unlike the standard literature, in which tax evasion cushions business cycle fluctuations, here we find that it amplifies macroeconomic fluctuations considerably.

Suggested Citation

  • Bruno Chiarini & Maria Ferrara & Elisabetta Marzano, 2018. "Credit Channel and Business Cycle: The Role of Tax Evasion," CESifo Working Paper Series 7169, CESifo.
    • Handle: RePEc:ces:ceswps:_7169
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    References listed on IDEAS

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    More about this item

    Keywords

    tax evasion; financial accelerator; business cycle; risk shocks; DSGE modeling;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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