IS – LM model revisited in the perspective of underground economy
| Published date | 03 July 2017 |
| Date | 03 July 2017 |
| DOI | https://doi.org/10.1108/JMLC-08-2016-0039 |
| Pages | 311-319 |
| Author | Debasish Roy |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
IS – LM model revisited in the
perspective of underground
economy
Debasish Roy
Department of Management, Sikkim University, Gangtok, India
Abstract
Purpose –The purpose of this paper is to review the investment-savings, liquidity-money (IS–LM) model
used in the traditional macroeconomic theory as an important tool to analyze the dynamics of product and
money market. The IS curve represents product market equilibrium condition and the LM curve represents
money market equilibrium condition. However, the traditional IS–LM model was formulated mainly keeping
in mind the dynamics of the product and money markets of developed economies. Thus, there was an urgent
need to explore the pre-established IS–LM model in the light of existing enormous, illicit underground
economies prevalent all around the world.
Design/methodology/approach –In this paper, an exploratory attempt has been made to review the
IS–LM model in the light of various illicit practices and by incorporating some assumptions that are relevant
to this discussion. In this model, IS
il
curve could be dened as a locus of points each representing a combination
of evaded tax and output of the illicit economy that will keep the illicit economy in equilibrium and, the LM
il
curve could be dened as a locus of points each representing a combination of illicit supply of money and
output of the illicit economy that will keep the illicit economy in equilibrium.
Findings –This paper is aimed at analyzing the traditional IS–LM model from a different perspective,
namely, the pervasive underground economy thriving all around the world regardless of the stages of growth
and development. A sincere attempt has been made to keep the assumptions simple and closest to the
real-world scenario as well as pertinent to the logic of economic theory. In this paper, two major factors of illicit
practices, i.e. tax evasion and bribery, are given prime importance and the discussion is focused on those two
factors of corruption.
Originality/value –This paper has been prepared keeping in view the standard technical procedures and
ndings that are described in the relevant academic materials like textbooks and journal publications
(mentioned under the “References” column). The analysis and ndings appearing in the article are based on
logical explanations and are completely free from plagiarism.
Keywords Demand for illicit money, Illicit economy, IS
il
curve, LM
il
curve, Supply of illicit money
Paper type Conceptual paper
Introduction
As the term “illicit” or “underground” economy consists of various types of malpractices
such as bribery, tax evasion, grafting, there was an initial predicament of either choosing a
“single most” important index of corruption or simply club the various forms into a
composite variable. In this paper, the “tax evasion” factor has been chosen as the suitable
variable of corruption or illicit practices keeping in mind the enormous amount of illicit
money being stashed at the “tax havens” like Swiss Bank, Channel Island, Cayman Islands
etc. from all over the world every year. According to a paper published by Internal Revenue
Service (IRS) of USA Treasury on “Abusive Offshore Tax Avoidance Schemes – Talking
points during 2008”, it is estimated that some US$$5tn in assets are held “offshore” in tax
havens and, according to one authority’s estimate, the annual revenue loss to the USA is a
minimum of US$70bn[1].
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
Perspective of
underground
economy
311
Journalof Money Laundering
Control
Vol.20 No. 3, 2017
pp.311-319
©Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-08-2016-0039
To continue reading
Request your trial