Shadow Economies at Times of Banking Crises: Empirics and Theory

Emilio Colombo, Luisanna Onnis, Patrizio Tirelli

Research output: Contribution to journalArticle

12 Citations (Scopus)

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 and labour market frictions and for 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 technology is relatively more labour intensive. Following a banking shock in the official sector, the model predicts a large negative transmission to the unofficial economy that substantially dampens the overall effect of the shock.
Original languageEnglish
Pages (from-to)180-190
Number of pages11
JournalJournal of Banking and Finance
Volume62
Early online date16 Oct 2014
DOIs
Publication statusPublished - Jan 2016
Externally publishedYes

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