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The Dynamics of Parallel Economies. Measuring the Informal Sector in M�xico

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  • Jos� Brambila Macias

    () (Department of Economics, University Of Venice C� Foscari)

  • Guido Cazzavillan

    (Department of Economics, University Of Venice C� Foscari)

Abstract

The existence of parallel economies that operate in the shadows of informality within most Latin American countries is widely recognized by the economic literature. However, its composition, size and effects on economic growth are still open questions. In this paper, we estimate the size and the evolution of the Mexican informal economy in the last three decades using a vector error correction model. In addition to the standard explanatory variables traditionally used in the currency demand approach, we include remittances given their relevance in the Mexican economic system. The results indicate that informality prior to the late 1980�s accounted for at least two thirds of GDP, while stabilizing around one third of GDP in the last decade. Furthermore, our estimates provide evidence of a positive long run relationship between informality and economic growth.

Suggested Citation

  • Jos� Brambila Macias & Guido Cazzavillan, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in M�xico," Working Papers 2008_42, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2008_42
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    2. Guillermo Javier Vuletin, 2008. "Measuring the Informal Economy in Latin America and the Caribbean," IMF Working Papers 08/102, International Monetary Fund.
    3. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303-303.
    4. Peter S. Spiro, 1996. "Monetary Estimates of the Underground Economy: A Critical Evaluation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(s1), pages 171-175, April.
    5. 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 423-439.
    6. Hendry, David F., 1995. "Dynamic Econometrics," OUP Catalogue, Oxford University Press, number 9780198283164.
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    8. Maurizio Bovi & Roberto Dell’Anno, 2010. "The changing nature of the OECD shadow economy," Journal of Evolutionary Economics, Springer, vol. 20(1), pages 19-48, January.
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    Cited by:

    1. José Brambila Macias & Guido Cazzavillan, 2010. "Modeling the informal economy in Mexico:a structural equation approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(1), pages 345-365, September.

    More about this item

    Keywords

    Informal Sector; currency demand; VEC; Remittances;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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