Shadow Economy in Pakistan: Its Size and Interaction with Official Economy

Khurrum Mughal, Friedrich Schneider () and Zafar Hayat

MPRA Paper from University Library of Munich, Germany

Abstract: Shadow economy encompasses wide array of activities that influence the official economy and government policies, either directly or indirectly. In this paper we estimate the shadow economy of Pakistan using currency demand approach with two econometric approached, i.e. one using Auto Regressive Distributed Lag (ARDL) model and two with Engel Granger two step approach. Additionally, we use a variant of currency demand approach where along with tax variable we include unemployment rate and intensity of government control as indicator variables of shadow economy, for the first time in case of Pakistan. The average shadow economy of Pakistan estimated from 1973-2015 as percentage of GDP is 26.41, 25.29, and 26.11 from Models 1, 2, and 3 respectively. Furthermore, we analyzed interaction between the official and shadow sector using ARDL model. Our results show a significantly increasing shadow economy in Pakistan with positive impact on the official sector in long run while negative impact in the short run. This again is a novelty in our paper where we observe short and long run impacts separately along with dynamic simulations to show Pakistan’s GDP per Capita in the absence of shadow economy.

Keywords: Shadow Economy; Pakistan; Impact of the official Sector; Currency Demand Approach (search for similar items in EconPapers)
JEL-codes: E26 H26 K42 O17 (search for similar items in EconPapers)
Date: 2018-05-30
New Economics Papers: this item is included in nep-iue and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Shadow Economy in Pakistan: Its Size and Interaction with Official Economy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:87812

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