Underground economy estimates for non-OECD countries using currency demand method, 1984-2005

The paper estimates the size of underground economy induced by tax evasion for cross-section of non-OECD countries using currency demand method. Unlike previous studies which usually focus only on the tax rate as the tax evasion factor, the paper presents theory consistent tax evasion estimates by augmenting the enforcements strength of the tax administration as additional determinant of the level of tax evasion. The estimation strategy includes the use of the Arellano-Bond GMM dynamic panel data method that is suitable in dealing with the issue of persistence and endogeneity problems in the estimation of currency demand equation. The study finds substantial underground economy in the non-OECD countries for the period 1984-2005 ranging from 2-69 percent of GDP.