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Measuring the size of the shadow economy using a dynamic general equilibrium model with trends

Listed author(s):
  • Solis-Garcia, Mario
  • Xie, Yingtong

We propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output.

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File URL: https://mpra.ub.uni-muenchen.de/78968/1/MPRA_paper_78968.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 78968.

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Date of creation: 03 Jan 2017
Date of revision: 05 May 2017
Handle: RePEc:pra:mprapa:78968
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  1. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
  2. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo Group Munich.
  3. Andres Fernandez & Felipe Meza, 2015. "Informal Employment and Business Cycles in Emerging Economies: The Case of Mexico," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 381-405, April.
  4. 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.
  5. Friedman, Eric & Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 2000. "Dodging the grabbing hand: the determinants of unofficial activity in 69 countries," Journal of Public Economics, Elsevier, vol. 76(3), pages 459-493, June.
  6. Ihrig, Jane & Moe, Karine S., 2004. "Lurking in the shadows: the informal sector and government policy," Journal of Development Economics, Elsevier, vol. 73(2), pages 541-557, April.
  7. Ceyhun Elgin & Oguz Oztunali, 2012. "Shadow Economies around the World: Model Based Estimates," Working Papers 2012/05, Bogazici University, Department of Economics.
  8. Andres Fernandez & Felipe Meza, 2015. "Informal Employment and Business Cycles in Emerging Economies: The Case of Mexico," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 381-405, April.
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