IDEAS home Printed from https://ideas.repec.org/p/wii/bpaper/050.html
   My bibliography  Save this paper

Inflation and Endogenous Growth in Underground Economies

Author

Listed:
  • Dario Cziraky
  • Max Gillman

Abstract

The paper examines the effect of inflation on the growth rate in economies with underground, or ”non-market”, sectors. The model incorporates a non-market good into an endogenous growth cash-inadvance economy with human capital. Taxes on labor and capital induce substitution into the non-market sector which avoids such taxes. However the non-market sector uses only cash for exchange and cannot avoid the inflation tax, while the market sector allows costly credit use. We estimate a MIMIC model for latent underground economy using monthly data for Bulgaria, Croatia and Romania. Furthermore, we estimate a dynamic structural equation model and investigate short-run effects of the underground economy on output growth and test for Granger causality and long-run cointegrating relationships using bivariate Granger-causality tests and Johansen’s maximum likelihood technique. The result indicate different shares of underground economies across the three countries and a positive long-run effect of underground economy on output growth.

Suggested Citation

  • Dario Cziraky & Max Gillman, 2004. "Inflation and Endogenous Growth in Underground Economies," wiiw Balkan Observatory Working Papers 50, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:bpaper:050
    as

    Download full text from publisher

    File URL: https://wiiw.ac.at/inflation-and-endogenous-growth-in-underground-economies-dlp-3258.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Friedrich Schneider & Robert Klinglmair, 2004. "Shadow economies around the world: what do we know?," Economics working papers 2004-03, Department of Economics, Johannes Kepler University Linz, Austria.
    2. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    3. Max Gillman & Mark N. Harris & László Mátyás, 2004. "Inflation and growth: Explaining a negative effect," Empirical Economics, Springer, vol. 29(1), pages 149-167, January.
    4. Schneider, Friedrich, 2005. "Shadow economies around the world: what do we really know?," European Journal of Political Economy, Elsevier, vol. 21(3), pages 598-642, September.
    5. David E. A. Giles & Betty J. Johnson, 1999. "Taxes, Risk-Aversion, and the Size of the Underground Economy: A Nonparametric Analysis With New Zealand Data," Econometrics Working Papers 9910, Department of Economics, University of Victoria.
    6. Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages 370-380, June.
    7. Stephen L. Parente & Richard Rogerson & Randall Wright, 1999. "Household production and development," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 21-35.
    8. repec:ces:ifodic:v:1:y:2003:i:1:p:14567827 is not listed on IDEAS
    9. Yoshiaki Azuma & Herschel I. Grossman, 2008. "A Theory Of The Informal Sector," Economics and Politics, Wiley Blackwell, vol. 20(1), pages 62-79, March.
    10. Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53.
    11. Friedrich Schneider, 2000. "Illegal Activities, but Still Value Added Ones (?): Size, Causes, and Measurement of the Shadow Economies all over the World," CESifo Working Paper Series 305, CESifo.
    12. Geweke, John F & Singleton, Kenneth J, 1981. "Maximum Likelihood "Confirmatory" Factor Analysis of Economic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(1), pages 37-54, February.
    13. Kenneth Bollen, 1996. "An alternative two stage least squares (2SLS) estimator for latent variable equations," Psychometrika, Springer;The Psychometric Society, vol. 61(1), pages 109-121, March.
    14. David Giles & Lindsay Tedds & Gugsa Werkneh, 2002. "The Canadian underground and measured economies: Granger causality results," Applied Economics, Taylor & Francis Journals, vol. 34(18), pages 2347-2352.
    15. Frey, Bruno S & Weck, Hannelore, 1983. "Estimating the Shadow Economy: A 'Naive' Approach," Oxford Economic Papers, Oxford University Press, vol. 35(1), pages 23-44, March.
    16. Piggott, John & Whalley, John, 1996. "The Tax Unit and Household Production," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 398-418, April.
    17. David E. A. Giles, 1999. "Modelling the hidden economy and the tax-gap in New Zealand," Empirical Economics, Springer, vol. 24(4), pages 621-640.
    18. Friedrich Schneider, 2003. "The Development of the Shadow Economies and Shadow Labour Force of 21 OECD and 22 Transition Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 1(1), pages 17-23, 02.
    19. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December.
    20. Bhattacharyya, Dilip K, 1990. "An Econometric Method of Estimating the 'Hidden Economy,' United Kingdom (1960-1984): Estimates and Tests," Economic Journal, Royal Economic Society, vol. 100(402), pages 703-717, September.
    21. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    22. David Giles & Patrick Caragata, 2001. "The learning path of the hidden economy: the tax burden and tax evasion in New Zealand," Applied Economics, Taylor & Francis Journals, vol. 33(14), pages 1857-1867.
    23. Simon Johnson & Daniel Kaufman & Andrei Shleifer, 1997. "The Unofficial Economy in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 159-240.
    24. Stephen L. Parente & Richard Rogerson & Randall Wright, 2000. "Homework in Development Economics: Household Production and the Wealth of Nations," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 680-687, August.
    25. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    26. Zellner, Arnold, 1970. "Estimation of Regression Relationships Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 441-454, October.
    27. Friedrich Schneider, 2003. "The Development of the Shadow Economies and Shadow Labour Force of 21 OECD and 22 Transition Countries," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 1(01), pages 17-23, February.
    28. Singleton, Kenneth J, 1980. "A Latent Time Series Model of the Cyclical Behavior of Interest Rates," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(3), pages 559-575, October.
    29. Max Gillman & Michal Kejak, 2004. "The Demand for Bank Reserves and Other Monetary Aggregates," Economic Inquiry, Western Economic Association International, vol. 42(3), pages 518-533, July.
    30. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
    31. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-392, May.
    32. Mr. Ebrima A Faal, 2003. "Currency Demand, the Underground Economy, and, Tax Evasion—The Case of Guyana," IMF Working Papers 2003/007, International Monetary Fund.
    33. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
    34. Goldberger, Arthur S, 1972. "Maximum-Likelihood Estimation of Regressions Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 1-15, February.
    35. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
    36. Einarsson Tor & Marquis Milton Harrison, 2001. "Fiscal Policy and Human Capital Accumulation in a Home Production Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-33, July.
    37. Yoshiaki Azuma & Herschel I. Grossman, 2008. "A Theory Of The Informal Sector," Economics and Politics, Wiley Blackwell, vol. 20(1), pages 62-79, 03.
    38. Ms. Era Dabla-Norris & Mr. Andrew Feltenstein, 2003. "An Analysis of the Underground Economy and its Macroeconomic Consequences," IMF Working Papers 2003/023, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Khorana, Sangeeta & Caram, Santiago & Biagetti, Marco, 2021. "Vicious Circle or New Paradigm? Exploring the Impact of Shadow Economy on Labour Market in Latin America and Eurozone," GLO Discussion Paper Series 983, Global Labor Organization (GLO).
    2. Afonso, Oscar & Neves, Pedro Cunha & Pinto, Tiago, 2020. "The non-observed economy and economic growth: A meta-analysis," Economic Systems, Elsevier, vol. 44(1).
    3. Nikopour, Hesam & Shah Habibullah, Muzafar & Schneider, Friedrich, 2008. "The shadow economy Kuznets’s curve panel data analysis," MPRA Paper 12956, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Friedrich Schneider & Andreas Buehn & Claudio E. Montenegro, 2011. "Shadow Economies All Over the World: New Estimates for 162 Countries from 1999 to 2007," Chapters, in: Friedrich Schneider (ed.), Handbook on the Shadow Economy, chapter 1, Edward Elgar Publishing.
    2. Friedrich Schneider & Friedrich Schneider, 2008. "Shadow Economies and Corruption all over the World: What do we Really Know?," Chapters, in: Michael Pickhardt & Edward Shinnick (ed.), The Shadow Economy, Corruption and Governance, chapter 7, pages 122-187, Edward Elgar Publishing.
    3. Friedrich Schneider & Robert Klinglmair, 2004. "Shadow economies around the world: what do we know?," Economics working papers 2004-03, Department of Economics, Johannes Kepler University Linz, Austria.
    4. Schneider Friedrich & Buehn Andreas, 2017. "Shadow Economy: Estimation Methods, Problems, Results and Open questions," Open Economics, De Gruyter, vol. 1(1), pages 1-29, March.
    5. Friedrich SCHNEIDER, 2016. "Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions," Turkish Economic Review, KSP Journals, vol. 3(2), pages 256-280, June.
    6. Russo Francesco Flaviano, 2018. "Informality: the Doorstep of the Legal System," Open Economics, De Gruyter, vol. 1(1), pages 49-70, June.
    7. Schneider, Friedrich, 2014. "The Shadow Economy and Shadow Labor Force: A Survey of Recent Developments," IZA Discussion Papers 8278, Institute of Labor Economics (IZA).
    8. Friedrich Schneider, 2005. "Shadow Economies of 145 Countries all over the World: What Do We Really Know?," CREMA Working Paper Series 2005-13, Center for Research in Economics, Management and the Arts (CREMA).
    9. Friedrich Schneider & Christopher Bajada, 2003. "The Size and Development of the Shadow Economies in the Asia-Pacific," Economics working papers 2003-01, Department of Economics, Johannes Kepler University Linz, Austria.
    10. Friedrich Schneider & Gorana Krstić & Milojko Arsić & Saša Ranđelović, 2015. "What Is the Extent of the Shadow Economy in Serbia?," Contributions to Economics, in: Gorana Krstić & Friedrich Schneider (ed.), Formalizing the Shadow Economy in Serbia, edition 127, chapter 0, pages 47-75, Springer.
    11. Nezhyvenko, O., 2019. "Indirect or Macroeconomic Methods in Measuring the Informal Economy," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 8(4), pages 201-215, December.
    12. Andreas Buhn & Alexander Karmann & Friedrich Schneider, 2007. "Size and Development of the Shadow Economy and of Do-it-Yourself Activities: The Case of Germany," CREMA Working Paper Series 2007-14, Center for Research in Economics, Management and the Arts (CREMA).
    13. MAURIN Alain & SOOKRAM Sandra & WATSON Patrick Kent, 2010. "Measuring the Size of the Hidden Economy in Trinidad & Tobago," EcoMod2003 330700098, EcoMod.
    14. Chaudhuri, Kausik & Schneider, Friedrich & Chattopadhyay, Sumana, 2006. "The size and development of the shadow economy: An empirical investigation from states of India," Journal of Development Economics, Elsevier, vol. 80(2), pages 428-443, August.
    15. Schneider, Friedrich, 2004. "The Size of the Shadow Economies of 145 Countries all over the World: First Results over the Period 1999 to 2003," IZA Discussion Papers 1431, Institute of Labor Economics (IZA).
    16. Kausik Chaudhuri & Friedrich Schneider, 2011. "The Size and Development of the Shadow Economy in India: A First Attempt at a Public Choice Explanation," Chapters, in: Friedrich Schneider (ed.), Handbook on the Shadow Economy, chapter 3, Edward Elgar Publishing.
    17. Manamba EPAPHRA & Moga Tano JILENGA, 2017. "Currency Demand, the Subterranean Economy and Tax Evasion: The Case of Tanzania," Journal of Economic and Social Thought, KSP Journals, vol. 4(2), pages 187-211, June.
    18. Colin C. Williams & Friedrich Schneider, 2016. "Measuring the Global Shadow Economy," Books, Edward Elgar Publishing, number 16551.
    19. James Alm & Abel Embaye, 2013. "Using Dynamic Panel Methods to Estimate Shadow Economies Around the World, 1984-2006," Working Papers 1303, Tulane University, Department of Economics.
    20. D’Hernoncourt, Johanna & Méon, Pierre-Guillaume, 2012. "The not so dark side of trust: Does trust increase the size of the shadow economy?," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 97-121.

    More about this item

    Keywords

    Shadow economy; endogenous growth; dynamic structural equation modelling; latent variables;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wii:bpaper:050. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Customer service (email available below). General contact details of provider: https://edirc.repec.org/data/wiiwwat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.