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Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006

Author

Listed:
  • James Alm

    () (Department of Economics, Tulane University)

  • Abel Embaye

    () (Department of Economics, University of Arkansas)

Abstract

The paper estimates the size of shadow economy for 111 countries for the years 1984 to 2006 based on the currency demand approach. An important innovation is our use of dynamic panel data methods, which allows us to make several important contributions. First, we estimate the shadow economy for a range of heterogeneous countries that previously could not be included in the same regression. Second, we include variables that measure institutional quality in countries, including a variable that measures enforcement efforts. Third, we account for the persistence of currency demand as it evolves over time. Our results indicate a substantial shadow economy across countries, ranging from 10 to 86 percent of GDP, with some tendency to grow over time. We also find that the shadow economy varies significantly by country income group. The mean shadow economy is 17 percent of GDP for OECD countries, 24 percent for non-OECD high income countries, 33 percent for upper middle income countries, 37 percent for lower middle income countries, and 38 percent for low income countries.

Suggested Citation

  • James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006," Working Papers 1303, Tulane University, Department of Economics.
  • Handle: RePEc:tul:wpaper:1303
    as

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    File URL: http://repec.tulane.edu/RePEc/pdf/tul1303.pdf
    File Function: First Version, February 2013
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    tax evasion; shadow economy; currency demand method; panel data;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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