Informal Production in a New Keynesian Model

General DSGE Modeling
1

Hello everyone,

I am trying to extend a basic New Keynesian Model to also include the informal production sector and households supplying informal labor. For this, I would like to either divide the production sector into two subsectors (formal and informal ones) or assume that a representative firm produces a good by using both formal and informal labor, whereas only the fraction of goods produced using formal technology is taxable.
Which of the two approaches would you suggest is better for analyzing fiscal policy implications for business cycles or which of the two ways is preferable in terms of implementation in Dynare? The type of policy I am looking at is environmental policy (eg. carbon tax).

Thank you very much in advance!

2

I am not an expert here, but often such structures are isomorphic. Either the informal part takes place within a firm or you put in an intermediate production step (e.g. bundlers or retailers often introduced in the model).