Abstract:
The business cycle characteristics of the legitimate economy have
been examined quite extensively. In this paper we extend the standard
business cycle analysis to the underground economy and compare it to
the legitimate economy. Using National Bureau of Economic Research
dating methodologies we find that classical cycles exhibit strong incidence
of asymmetry while growth cycles appear relatively symmetric.
We find that changes in legitimate activity lead to changes in underground
activity but that the underground economy responds more to
negative shocks in legitimate activity than to positive shocks. This implies
that the underground economy is deepening economic downturns and
increasing the volatility of the business cycle in general.
