DSGE models were used to study economic fluctuations in Italy and how they spread between countries. A modified RBC model with labor costs and an underground sector was found to better explain Italian fluctuations. Shocks affect relative prices and quantities of tradeables vs. nontradeables, with money having sectoral effects. Aggregate effects of shocks on macroeconomic variables depend on parameters and assumptions about labor productivity. Individuals not working in both sectors leads to lower elasticity of costs with output.