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Currency demandand MIMIC models: towards a structured hybrid model-based estimation of the shadow economy size

Author

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  • Piotr Dybka
  • Michal Kowalczuk
  • Bartosz Olesinski
  • Marek Rozkrut
  • Andrzej Toroj

Abstract

Model-based econometric techniques of the shadow economy estimation have been increasingly popular, but a systematic approach to getting the best of their complementarities has so far been missing. We review the dominant approaches in the literature –currency demand analysis (CDA) and MIMIC model – and propose a novel hybrid procedure that addresses their previous critique, in particular the misspecification issues in CDA equations and the vague transformation of the latent variable obtained via MIMIC model into interpretable levels and paths of the shadow economy. Our proposal is based on a new identification scheme for the MIMIC model, referred to as 'reverse standarizaton'. It supplies the MIMIC model with the panel-structured information on the latent variable's mean and variance obtained from the CDA estimates, treating this information as given in the restricted full information maximum likelihood function. This approach allows us to avoid some controversial steps, such as choosing an externally estimated reference point for benchmarking or adopting other ad hoc identifying assumptions. We estimate the shadow economy for up to 43countries, with the results obtained in the range of 2.8% to 29.9% of GDP. Various versions of our models remain robust as regards changes in the level of the shadow economy over time and the relative position of the analysed countries. We also find that the contribution of (a correctly specified) MIMIC model to the measurement of trends in the shadow economy is marginal as compared to the contribution of the CDA model.

Suggested Citation

  • Piotr Dybka & Michal Kowalczuk & Bartosz Olesinski & Marek Rozkrut & Andrzej Toroj, 2017. "Currency demandand MIMIC models: towards a structured hybrid model-based estimation of the shadow economy size," Working Papers 2017-030, Warsaw School of Economics, Collegium of Economic Analysis.
  • Handle: RePEc:sgh:kaewps:2017030
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    References listed on IDEAS

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    Cited by:

    1. Philippe Adair, 2017. "Non-Observed Economy vs. the Shadow Economy in the EU: The Accuracy of Measurements Methods and Estimates revisited," Post-Print hal-01683929, HAL.

    More about this item

    Keywords

    Shadow economy; MIMIC; Currency Demand Approach; Restricted Full Information Maximum Likelihood;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • 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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