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Estimating the Underground Economy using MIMIC Models

  • Trevor Breusch

MIMIC models are being used to estimate the size of the underground economy or the tax gap in various countries. In this paper I examine critically both the method in general and three applications of the method by Giles and Tedds (2002), Bajada and Schneider (2005) and Dell’Anno and Schneider (2003). Connections are shown to familiar econometric models of linear regression and simultaneous equations. I also investigate the auxiliary procedures used in this literature, including differencing as a treatment for unit roots and the calibration of results using other data. The three applications demonstrate how the method is subjective and pliable in practice. I conclude that the MIMIC method is unfit for the purpose.

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File URL: http://econwpa.repec.org/eps/em/papers/0507/0507003.pdf
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Paper provided by EconWPA in its series Econometrics with number 0507003.

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Length: 36 pages
Date of creation: 12 Jul 2005
Date of revision: 25 Jul 2005
Handle: RePEc:wpa:wuwpem:0507003
Note: Type of Document - pdf; pages: 36
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World; Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
  2. Trevor Breusch, 2005. "Australia's Cash Economy: Are the estimates credible?," Macroeconomics 0509025, EconWPA, revised 23 Sep 2005.
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