Examination of Underground Economy and Tax Evasion within the Framework of Dynamic Stochastic General Equilibrium Models (DSGE)

Planning for economic development and making a decision for the implementation of economic policies, need to understand the performance of the whole economy, including the official sector and the underground sector. Understanding the performance of the whole economy requires to know economic information system situation and its efficiency. This study used a DSGE model framework for modelling the underground economy and the effect of oil shock, fiscal impulses (such as changing tax rates) and the shock of productivity on the official economy and underground economy. The results of the evaluation showed that the present model was well able to simulate cyclical behavior and volatility of the variables. The results also showed that a positive impulse to the productivity of official sector caused an increase in official production and a decrease in underground economy and this consequently reduced tax evasion and increased government revenue. On the contrary an impulse to the underground sector productivity of, leaded to a decrease in official production, an increase in underground production and consequently an increase in tax evasion and reducing the government's revenues. Furthermore, a positive shock in the corporate tax rate and income tax rate reduced the official production, increased underground production and tax evasion and decreased government revenue. Positive shock to oil revenues increased official production and reduced underground economy and consequently reduced tax evasion and increased revenue for the government..