Shadow Economies at Times of Banking Crises: Empirics and Theory

41 Pages Posted: 19 Jul 2013 Last revised: 21 Jul 2013

See all articles by Emilio Colombo

Emilio Colombo

Catholic University of the Sacred Heart of Milan

Luisanna Onnis

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS)

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Date Written: February 1, 2013

Abstract

This paper investigates the response of the shadow economy to banking crises. Our empirical analysis, based on a large sample of countries, suggests that the informal sector is a powerful buffer, which expands at times of banking crises and absorbs a large proportion of the fall in official output. To rationalise our evidence, we build a dynamic stochastic general equilibrium model which accounts for financial frictions and nominal rigidities. In line with the empirical literature on the shadow economy, we assume that in the informal sector access to external finance is limited, and the production tech- nology is relatively more labour intensive. Following a banking shock in the official sector, the model predicts a large negative transmission to the unofficial economy: about 60% of the official sector contraction is absorbed by the growth of the shadow economy.

Keywords: Financial crises, shadow economy, DSGE models

JEL Classification: E26, E32, E44

Suggested Citation

Colombo, Emilio and Onnis, Luisanna and Tirelli, Patrizio, Shadow Economies at Times of Banking Crises: Empirics and Theory (February 1, 2013). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 234, Available at SSRN: https://ssrn.com/abstract=2295125 or http://dx.doi.org/10.2139/ssrn.2295125

Emilio Colombo (Contact Author)

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Luisanna Onnis

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Patrizio Tirelli

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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