Implementing Machine Learning Methods in Estimating the Size of the Non-observed Economy

Labib Shami () and Teddy Lazebnik
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Labib Shami: Western Galilee College
Teddy Lazebnik: University College London

Computational Economics, 2024, vol. 63, issue 4, No 6, 1459-1476

Abstract: Abstract Even though the literature on unregistered economic activity is growing at an increasing rate, we commonly encounter simple ordinary least squares methods and panel regressions, largely ignoring the recent rapid developments in machine learning methods. This study provides a new approach to more accurately estimate the size of the non-observed economy using machine learning methods. Compared to two currency demand-based models used to estimate the size of the non-observed economy, we show that a Random Forest algorithm can more accurately estimate the demand for currency, which is known to provide a fair estimation of the unregistered economic activity. The proposed approach shows superior forecasting capabilities compared to the current state-of-the-art linear regression-based methods dedicated to estimating non-observed economic activity.

Keywords: Informal economy; Demand for money; Tax evasion and avoidance; Shadow economy; Machine learning in economics; E26; E41; H26; O17 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-023-10369-4

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