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Challenging the popular wisdom. New estimates of the unobserved economy

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  • Luisanna Onnis
  • Patrizio Tirelli

Abstract

We estimate the unrecorded economy in 49 economies from 1981 to 2005. Our study is based on electricity consumption series which are fil- tered to account for technological change and for the changing weight of the energy-intensive industrial sector. In contrast with studies based on the MIMIC method, we obtain a reduction in the weight of the unobserved economy. Unlike La Porta and Shleifer (2008), we identify measures of institutional quality which are significantly related to the shadow econ- omy even after controlling for per-capita GDP. Thus the shadow economy should not be dismissed as the unpleasant side e¤ect of underdevelopment. Instead it is related to some specific institutional aspects that may well survive even when the economy reaches higher development stages. We identify strong substitution effects between official and unofficial sectors both in the long run and over the business cycle. This has important impli- cations for income convergence and for the relationship between volatility and growth.

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  • Luisanna Onnis & Patrizio Tirelli, 2010. "Challenging the popular wisdom. New estimates of the unobserved economy," Working Papers 184, University of Milano-Bicocca, Department of Economics, revised Apr 2010.
    • Handle: RePEc:mib:wpaper:184
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    Cited by:

    1. Gebhard Kirchgässner, 2017. "On Estimating the Size of the Shadow Economy," German Economic Review, Verein für Socialpolitik, vol. 18(1), pages 99-111, February.
    2. Luisanna Onnis & Patrizio Tirelli, 2015. "Shadow economy: Does it matter for money velocity?," Empirical Economics, Springer, vol. 49(3), pages 839-858, November.
    3. Colombo, Emilio & Onnis, Luisanna & Tirelli, Patrizio, 2016. "Shadow economies at times of banking crises: Empirics and theory," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 180-190.
    4. Bogdan Mróz, 2012. "The Shadow Economy and Systemic Transformation: The Case of Poland," Chapters, in: Michael Pickhardt & Aloys Prinz (ed.), Tax Evasion and the Shadow Economy, chapter 6, Edward Elgar Publishing.
    5. Raffaella Basile & Bruno Chiarini & Elisabetta Marzano, 2011. "Can we Rely upon Fiscal Policy Estimates in Countries with Unreported Production of 15 Per Cent (or more) of GDP?," CESifo Working Paper Series 3521, CESifo.

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