| Abstract: | This paper builds a three‐sector DSGE (Dynamic Stochastic General Equilibrium) model, considering explicitly the interactions among regular, underground and criminal sectors. We generated quarterly data for unobserved variables for Italian economy over the sample 1974:01–2011:02, through Monte Carlo simulations, and we found that underground economy is about 20 per cent of GDP, whereas criminal economy is 11 per cent. The dynamic behavior of the model shows that (1) regular production has a greater relative volatility with respect to unobserved production, (2) an efficient law enforcement activity is able to weaken unobserved activities and (3) unobserved sectors' variables exhibit a negative correlation with the corresponding ones of regular economy. |
