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MIMIC Models, Cointegration and Error Correction: An Application to the French Shadow Economy

Listed author(s):
  • Buehn, Andreas

    ()

    (Institute for Advanced Sustainability Studies (IASS))

  • Schneider, Friedrich

    ()

    (University of Linz)

The analysis of economic loss attributed to the shadow economy has attracted much attention in recent years by both academics and policy makers. Often, multiple indicators multiple causes (MIMIC) models are applied to time series data estimating the size and development of the shadow economy for a particular country. This type of model derives information about the relationship between cause and indicator variables and a latent variable, here the shadow economy, from covariance structures. As most macroeconomic variables do not satisfy stationarity, long run information is lost when employing first differences. Arguably, this shortcoming is rooted in the lack of an appropriate MIMIC model which considers cointegration among variables. This paper develops a MIMIC model which estimates the cointegration equilibrium relationship and the error correction short run dynamics, thereby retaining information for the long run. Using France as our example, we demonstrate that this approach allows researchers to obtain more accurate estimates about the size and development of the shadow economy.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3306.

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Length: 30 pages
Date of creation: Jan 2008
Handle: RePEc:iza:izadps:dp3306
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  1. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Oxford University Press, vol. 61(4), pages 631-653.
  2. Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages 370-380, June.
  3. Annette Mummert & Friedrich Schneider, 2001. "The German Shadow Economy: Parted in a United Germany?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(3), pages 286-286, July.
  4. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
  5. Schneider, Friedrich, 1994. "Can the Shadow Economy Be Reduced through Major Tax Reforms? An Empirical Investigation for Austria," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 137-152.
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