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Inflation and Endogenous Growth in Underground Economies

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  • Max Gillman
  • Dario Cziráky

Abstract

The paper examines the effect of inflation on the growth rate in economies with underground, or ”non-market”, sectors. The model incorporates a non-market good into an endogenous growth cash-inadvance economy with human capital. Taxes on labor and capital induce substitution into the non-market sector which avoids such taxes. However the non-market sector uses only cash for exchange and cannot avoid the inflation tax, while the market sector allows costly credit use. We estimate a MIMIC model for latent underground economy using monthly data for Bulgaria, Croatia and Romania. Furthermore, we estimate a dynamic structural equation model and investigate short-run effects of the underground economy on output growth and test for Granger causality and long-run cointegrating relationships using bivariate Granger-causality tests and Johansen’s maximum likelihood technique. The result indicate different shares of underground economies across the three countries and a positive long-run effect of underground economy on output growth.

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Bibliographic Info

Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Balkan Observatory Working Papers with number 050.

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Date of creation: Jun 2004
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Publication status: Published as The wiiw Balkan Observatory Working Paper, June 2004
Handle: RePEc:wii:bpaper:bowp:050

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Related research

Keywords: Shadow economy; endogenous growth; dynamic structural equation modelling; latent variables;

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References

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Cited by:
  1. Nikopour, Hesam & Shah Habibullah, Muzafar & Schneider, Friedrich, 2008. "The shadow economy Kuznets’s curve panel data analysis," MPRA Paper 12956, University Library of Munich, Germany.

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