Currency demand and MIMIC models: towards a structured hybrid method of measuring the shadow economy

Piotr Dybka, Michał Kowalczuk, Bartosz Olesiński, Andrzej Torój and Marek Rozkrut
Additional contact information
Bartosz Olesiński: EY Economic Analysis Team
Marek Rozkrut: EY Economic Analysis Team

International Tax and Public Finance, 2019, vol. 26, issue 1, No 2, 4-40

Abstract: Abstract Model-based econometric techniques of the shadow economy estimation have been increasingly popular, but a systematic approach to getting the best of their complementarities has so far been missing. We review the dominant approaches in the literature—currency demand analysis and MIMIC model—and propose a hybrid procedure that addresses their previous critique, in particular the misspecification issues in CDA equations and the vague transformation of the latent variable obtained via MIMIC model into interpretable levels and paths of the shadow economy. We propose a new identification scheme for the MIMIC model, referred to as ‘reverse standarization’. It supplies the MIMIC model with the panel-structured information on the latent variable’s mean and variance obtained from the CDA estimates, treating this information as given in the restricted full information maximum likelihood function. This approach allows avoiding some controversial steps, such as choosing an externally estimated reference point for benchmarking or adopting other ad hoc identifying assumptions. We estimate the shadow economy for up to 43 countries, with the results obtained in the range of 2.8–29.9% of GDP. Various versions of our models remain robust as regards changes in the level of the shadow economy over time and the relative position of the analysed countries. We also find that the contribution of (a correctly specified) MIMIC model to the measurement of trends in the shadow economy is marginal as compared to the contribution of the CDA model, confirming the scepticism of some previous literature towards this method.

Keywords: Shadow economy; MIMIC; Currency demand approach; Restricted full information maximum likelihood (search for similar items in EconPapers)
JEL-codes: C10 C51 C59 E26 H26 O17 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
http://link.springer.com/10.1007/s10797-018-9504-5 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Currency demandand MIMIC models: towards a structured hybrid model-based estimation of the shadow economy size (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:26:y:2019:i:1:d:10.1007_s10797-018-9504-5

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-018-9504-5

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().