Erotokritos Varelas

Correspondence: Erotokritos Varelas, varelas@uom.edu.gr

University of Macedonia, Greece

pdf (775.31 Kb) | doi:

Abstract

This article argues that the possibility there can be output unreported to the authorities, prompts expectations about the size of this output which can destabilize increasingly an economy experiencing otherwise a uniform oscillation. It follows logically that the “stability” of uniform fluctuations will be preserved if the policy maker aims at such fluctuations in unreported output too, but of exactly opposite direction (“double cycle” hypothesis), lessening in effect the fluctuation of overall output as well. The economy is one modeled in terms of the interplay between its banking sector and the government budget. Our conclusions hold independently of the source of unreported output allowing thus one to identify for analytical convenience this output with everything the term connotes except tax evasion. Assuming that borrower-lender asymmetric information leads to a fraction only of bank lending to be financing capital change, instability becomes a matter of the expectations about this fraction too, about credit rationing; much more so when the capital change involves both sectors of the economy. The link between the two types of expectations is that they are both shaped by the stage of the business cycle, making the “double cycle” target attainable by means of the manipulation of “lending” or the same, credit-rationing expectations. The introduction of money or bank industry structure into the analysis does not appear to alter these conclusions; nor does the examination of the subject in terms of labor in the place of capital ̶ examination enabled analytically through the use of a CES production function.

Keywords:

  Unreported output, expectations, banking, government budget, double cycle, stability

References

Ardizzi, Guerino, Carmelo Petraglia, Massimiliano Piacenza and Gilberto Turati (2012), “Measuring the Underground Economy with the Currency Demand Approach: A Reinterpretation of the Methodology, with an Application to Italy”, Bank of Italy Working Paper 864. https://www.bancaditalia.it/pubblicazioni/temi-discussione/2012/2012-0864/en_tema_864.pdfAuriol, Emmanuelle and Michel Warlters (2005), Taxation Base in Developing Countries, Journal of Public Economics, 89, 625-646.Beck, Thorsten, Asli Demirgüç-Kunt and María Soledad Martínez Pería (2011), “Bank Financing for SMEs around the World: Drivers, Obstacles, Business Models, and Lending Practices”, Journal of Financial Services Research, 39(1-2), 35-54.Blinder, Alan S. (1987), “Credit Rationing and Effective Supply Failures”, Economic Journal, 97(386), 327-352.Capasso, Salvatore, Stefano Monferrà and Gabriele Sampagnaro (2015), “The Shadow Economy and Banks’ Lending Technology,” Centre for Studies in Economics and Finance Working Papers 422. http://www.csef.it/WP/wp422.pdfCasey, Eddie and Conor M. O’Toole (2014), “Bank-lending Constraints, Trade Credit and Alternative Financing during the Financial Crisis: Evidence from European SMEs”, Journal of Corporate Finance, 27(C), 173-193.Chiarini, Bruno and Elisabetta Marzano (2006), “Market Consumption and Hidden Consumption. A Test for Substitutability”, Applied Economics, 38(6), 707-716.Dabla‐Norris, Era and Andrew Feltenstein (2005), “The Underground Economy and its Macroeconomic Consequences”, Journal of Policy Reform, 8(2), 153-174.Distinguin, Isabelle, Clovis Rugemintwari and Ruth Tacneng (2016), “Can Informal Firms Hurt Registered SMEs’ Access to Credit?”, World Development, 84(C), 18-40.Feige, Edgar L. (1994), “The Underground Economy and the Currency Enigma”, Supplement to Public Finance/Finances Publiques, 49, 119-136Fernández, Andrés and Felipe Meza (2015), “Informal Employment and Business Cycles in Emerging Economies: The Case of Mexico”, Review of Economic Dynamics, 18(2), 381-405.Ferreira-Tiryaki, Gisele (2008), “The Informal Economy and Business Cycles”, Journal of Applied Economics, 11(1), 91-117.Frey, Bruno S. and Werner Pommerehne (1984), “The Hidden Economy: State and Prospect for Measurement”, Review of Income and Wealth, 30(1), 1-23.Giles, David E.A. (1997), “Testing for Asymmetry in the Measured and Underground Business Cycles in New Zealand”, Economic Record, 73(222), 225-232Gobbi, Giorgio and Roberta Zizza (2007), “Does the Underground Economy Hold Back Financial Deepening? Evidence from the Italian Credit Market”, Bank of Italy Working Paper 646. https://www.bancaditalia.it/pubblicazioni/temi-discussione/2007/2007-0646/en_tema_646.pdf?language_id=1Granda-Carvajal, Catalina (2010), “The Unofficial Economy and the Business Cycle: A Test for Theories”, International Economic Journal, 24(4), 573-586.Hasan, Iftekhar, Chun-Keung (Stan) Hoi, Qiang Wu and Hao Zhang (2014), “Beauty is in the eye of the beholder: The effect of corporate tax avoidance on the cost of bank loans”, Bank of Finland Research Discussion Paper 3.  https://helda.helsinki.fi/bof/bitstream/handle/123456789/7940/172917.pdf?sequence=1Hill, Roderick (2002), “The Underground Economy in Canada: Boom or Bust?”, Canadian Tax Journal / Revue Fiscale Canadienne, 50(5), 1641-1654Ketchen Jr, David J., R. Duane Ireland and Justin W. Webb (2014), “Toward a Research Agenda for the Informal Economy: A Survey of the Strategic Entrepreneurship Journal’s Editorial Board”, Strategic Entrepreneurship Journal, 8(1), 95-100.Klette, Tor Jacob and Zvi Griliches (1996), “The Inconsistency of Common Scale Estimators when Output Prices are Unobserved and Endogenous”, Journal of Applied Econometrics, 11(4), 343-361.McCarthy, Scott, Barry Oliver and Martie-Louise Verreynne (2017), “Bank financing and credit rationing of Australian SMEs”, Australian Journal of Management, 42(1), 58-85.Pickhardt, Michael and Jordi Sardà (2011), “Cash, Hoarding and the Underground Economy”, Center of Applied Economic Research Münster Working Paper 56.  https://www.econstor.eu/bitstream/10419/57172/1/689527926.pdfRestrepo-Echavarría, Paulina (2014), “Macroeconomic Volatility: The Role of the Informal Economy”, European Economic Review, 70(C), 454-469.Russo, Francesco Flaviano (2010), “Double Business Cycle: The Hidden Economy in the US”, Unpublished paper, Boston University, Department of Economics.Schneider, Friedrich and Dominik H. Enste (2000), “Shadow Economies: Size, Causes, and Consequences”, Journal of Economic Literature, 38(1), 77-114.Tanzi, Vito (1980), “The Underground Economy in the United States: Estimates and Implications”, Banca Nazionale del Lavoro Quarterly Review, 135, 427-453.Werner, Richard A. (2013), “Towards a More Stable and Sustainable Financial Architecture – A Discussion and Application of the Quantity Theory of Credit”, Credit and Capital Markets – Kredit und Kapital, 46(3), 357-387.Williams, Colin C. and Sara Nadin (2010), “Entrepreneurship and the Informal Economy: An Overview”, Journal of Developmental Entrepreneurship, 15(4), 361-378.