A Re-examination of the U.S. Underground Economy: Size, Estimation, and Policy Implications

M. Kabir Hassan and Jung Suk-Yu

No 2010-WP-04, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: We re-examine the size of the underground economy in the U.S. between 1972 and 2006, after properly adjusting for several statistical issues relating to its estimation. The dynamic error-correction-based currency demand approach confirms that income tax rates have no contemporaneous effect on currency demand, but they have positive and significant effects with a one-period lag. In addition, we observe that the size of the underground economy in the U.S. has grown considerably during the post-1990 period from $148.7 billion (3.4% of official GDP) in 1973 to $691.2 billion (6.0% of official GDP) in 2006. We also find that misspecified models have a propensity for overstating the size of the underground economy. During recessionary periods, the underground and official economies move in a same direction, although the growth rates of the underground economy are more unpredictable than those of the official economy.

Keywords: Underground economy; currency demand method; error correction model; non-stationarity with unit roots; serial correlations (search for similar items in EconPapers)
JEL-codes: C32 E26 E41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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