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Quantifying the shadow economy: measurement with theory

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  • Pedro Gomis-Porqueras
  • Adrian Peralta-Alva
  • Christopher J. Waller

Abstract

We construct a dynamic, general equilibrium model of tax evasion where agents choose to report some of their income. Unreported income requires using a payment method that avoids recordkeeping – cash. Trade using cash to avoid taxes is the theoretical measure of the shadow economy from our model. We then calibrate our model using money, interest rate and GDP data to back out the size of the shadow economy for a sample of 30 countries and compare our estimates to traditional ad hoc estimates. Our results generate reasonably larger estimates for the size of the shadow economy than exist in previous literature.>

Suggested Citation

  • Pedro Gomis-Porqueras & Adrian Peralta-Alva & Christopher J. Waller, 2011. "Quantifying the shadow economy: measurement with theory," Working Papers 2011-015, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2011-015
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    References listed on IDEAS

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    1. Waller, Christopher J., 2011. "Random Matching And Money In The Neoclassical Growth Model: Some Analytical Results," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S2), pages 293-312, September.
    2. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
    3. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, University Library of Munich, Germany.
    4. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages 338-347, June.
    5. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
    6. Koreshkova, Tatyana A., 2006. "A quantitative analysis of inflation as a tax on the underground economy," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 773-796, May.
    7. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    8. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-136.
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    Citations

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    Cited by:

    1. Bittencourt, Manoel & Gupta, Rangan & Stander, Lardo, 2014. "Tax evasion, financial development and inflation: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 194-208.
    2. Boel, Paola, 2013. "The Redistributive Effects of Inflation: an International Perspective," Working Paper Series 274, Sveriges Riksbank (Central Bank of Sweden), revised 01 Feb 2017.
    3. Misbah Kiani & Adeel Ahmed & Khalid Zaman, 2015. "Combining qualitative and quantitative approaches for measuring underground economy of Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(1), pages 295-317, January.

    More about this item

    Keywords

    Informal sector (Economics) ; Taxation ; Credit;

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