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Modelling the Egyptian Shadow Economy: A MIMIC model and A Currency Demand approach

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  • Mai HASSAN

    ()

  • Friedrich SCHNEIDER

    () (Department of Economics, Johannes Kepler University, Austria.)

Abstract

We estimate the size and trend of the Egyptian shadow economy using two of the most commonly used methods: the currency demand approach and the structural equation MIMIC model. To the best of our knowledge, this is the first study to estimate an index of the size of the shadow economy in Egypt during the last four decades (1976 to 2013). We address the long term association between the variables, relax the assumption of multivariate normality and demonstrate different scenarios of constraining the reference variable in the MIMIC model. In addition to the standard explanatory variables used in the literature, we consider variables that are specifically related to the Egyptian economy such as self-employment, agricultural importance and a proxy for institutional quality of democratic institutions. Our results indicate a decreasing trend of the size of the shadow economy, yet it still has a huge weight on the official GDP for a developing country like Egypt leading to some negative externalities and thus hindering the development of the country.

Suggested Citation

  • Mai HASSAN & Friedrich SCHNEIDER, 2016. "Modelling the Egyptian Shadow Economy: A MIMIC model and A Currency Demand approach," Journal of Economics and Political Economy, KSP Journals, vol. 3(2), pages 309-339, June.
  • Handle: RePEc:ksp:journ1:v:3:y:2016:i:2:p:309-339
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    2. Andreas Buehn & Mohammad Reza Farzanegan, 2013. "Impact of education on the shadow economy: Institutions matter," Economics Bulletin, AccessEcon, vol. 33(3), pages 2052-2063.
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    5. Schneider, Friedrich, 1986. " Estimating the Size of the Danish Shadow Economy Using the Currency Demand Approach: An Attempt," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(4), pages 643-668.
    6. Isachsen, Arne Jon & Strom, Steiner, 1985. "The Size and Growth of the Hidden Economy in Norway," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 31(1), pages 21-38, March.
    7. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters,in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc.
    8. Andreas Buehn, 2012. "The Shadow Economy in G erman Regions: An Empirical Assessment," German Economic Review, Verein für Socialpolitik, vol. 13(3), pages 275-290, August.
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    11. Hildegart Ahumada & Facundo Alvaredo & Alfredo Canavese, 2007. "The Monetary Method And The Size Of The Shadow Economy: A Critical Assessment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(2), pages 363-371, June.
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    Cited by:

    1. repec:ura:ecregj:v:1:y:2018:i:1:p:326-338 is not listed on IDEAS
    2. Hassan, Mai & Schneider, Friedrich, 2016. "Size and Development of the Shadow Economies of 157 Countries Worldwide: Updated and New Measures from 1999 to 2013," IZA Discussion Papers 10281, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Shadow economy of Egypt; MIMIC; CDA.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • I2 - Health, Education, and Welfare - - Education
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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