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Estimación de la informalidad económica en Paraguay con el índice Tanzi–Feige. Periodo de análisis marzo 2020 a noviembre 2024
[Estimation of Economic Informality in Paraguay with the Tanzi–Feige Index. Analysis Period March 2020 to November 2024]

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  • armoa garcia, roger roman

Abstract

This study estimates a monthly index of economic informality for Paraguay using the currency-demand shadow economy framework (Tanzi–Feige). We specify a log-linear cash demand function that includes the real interest rate, the price level (CPI), economic activity (GDP), and tax pressure.Series are transformed (logs and first differences where appropriate) based on ADF/KPSS tests; we also control for seasonality and outliers to support robust inference. The model’s unexplained component is interpreted as a monetary proxy for informality and is normalized to construct the index. Unlike simple accounting ratios (e.g., currency/M2), this approach adjusts for income, prices, and the opportunity cost of holding cash, isolating deviations attributable to the shadow economy. As an extension, we assessed including cooperative credit (CAC) to capture channels parallel to the formal banking system; we found no severe multicollinearity with tax pressure but (at most) moderate correlation, but we excluded CAC from the main specification due to heavy tails and heteroskedasticity. The results yield a parsimonious and stable index across sensitivity exercises (alternative specifications and diagnostic validation), and we discuss policy implications for tax design and payment traceability, together with limitations and avenues for future research.

Suggested Citation

  • armoa garcia, roger roman, 2025. "Estimación de la informalidad económica en Paraguay con el índice Tanzi–Feige. Periodo de análisis marzo 2020 a noviembre 2024 [Estimation of Economic Informality in Paraguay with the Tanzi–Feige I," MPRA Paper 126167, University Library of Munich, Germany, revised 24 Sep 2025.
    • Handle: RePEc:pra:mprapa:126167
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    References listed on IDEAS

    as
    1. Feige, Edgar L., 1990. "Defining and estimating underground and informal economies: The new institutional economics approach," World Development, Elsevier, vol. 18(7), pages 989-1002, July.
    2. Edgar L. Feige, 1979. "How Big Is the Irregular Economy?," Challenge, Taylor & Francis Journals, vol. 22(5), pages 5-13, November.
    3. 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.
    4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    5. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    7. A. I. McLeod & W. K. Li, 1983. "Diagnostic Checking Arma Time Series Models Using Squared‐Residual Autocorrelations," Journal of Time Series Analysis, Wiley Blackwell, vol. 4(4), pages 269-273, July.
    8. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Gilberto Turati, 2014. "Measuring the Underground Economy with the Currency Demand Approach: A Reinterpretation of the Methodology, With an Application to Italy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 747-772, December.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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