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

  • James Alm

    ()

    (Department of Economics, Tulane University)

  • Abel Embaye

    ()

    (Department of Economics, University of Arkansas)

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.

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File URL: http://econ.tulane.edu/RePEc/pdf/tul1303.pdf
File Function: First Version, February 2013
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Paper provided by Tulane University, Department of Economics in its series Working Papers with number 1303.

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Length: 41 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:tul:wpaper:1303
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  20. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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  25. Klovland, Jan Tore, 1984. " Tax Evasion and the Demand for Currency in Norway and Sweden. Is There a Hidden Relationship?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 86(4), pages 423-39.
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