01860cas a2200253 a 4500 AALejournalIMF002270 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451844061 1018-5941 BD-DhAAL BD-DhAAL Dabla-Norris, Era. An Analysis of the Underground Economy and its Macroeconomic Consequences / Era Dabla-Norris, Andrew Feltenstein. Washington, D.C. : International Monetary Fund, 2003. 1 online resource (26 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students This paper develops a dynamic computable general equilibrium model in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks. Our model simulations show that in the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base. Aggregate investment in the economy is lowered because of credit rationing. Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits. Thus, the optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity. Mode of access: Internet Feltenstein, Andrew. IMF Working Papers; Working Paper ; No. 2003/023 Full text available on IMF http://elibrary.imf.org/view/journals/001/2003/023/001.2003.issue-023-en.xml IMF e-Library