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Tax Evasion, Investment Shocks, and the Consumption Puzzle: A DSGE Analysis with Financial Frictions
Author(s) -
CHIARINI BRUNO,
FERRARA MARIA,
MARZANO ELISABETTA
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12616
Subject(s) - dynamic stochastic general equilibrium , economics , shock (circulatory) , business cycle , consumption (sociology) , investment (military) , monetary economics , new keynesian economics , tax evasion , evasion (ethics) , demand shock , macroeconomics , econometrics , monetary policy , public economics , medicine , social science , immune system , immunology , sociology , politics , biology , political science , law
Recent studies identify Marginal Efficiency of Investment (MEI) shocks as important drivers of the business cycle. However, Dynamic Stochastic General Equilibrium (DSGE) models struggle to explain macroeconomic comovements between consumption and the key real variables after a MEI shock. Moreover, engaging in tax evasion practices is often an answer to financial constraints, which have been recognized as important determinants of cyclical fluctuations as well. We use a medium‐scale New Keynesian DSGE model, that combines tax evasion with financial frictions, to simulate a MEI shock. We show that entrepreneurial tax evasion can solve the comovement problem to a fair extent.