Raising the Accuracy of Shadow Economy Measurements

This article estimates the size of the shadow economy in a Spanish region (Navarre) for the period 1986- 2016. To this end, we employ indirect macro-econometric methods such as the Currency Demand approach, Electricity Consumption (Physical Input) methods and the multiple indicators multiple causes (MIMIC) approach. A differential feature of our empirical analysis is that we incorporate various methodological innovations (e..g. Bayesian Model Averaging, a Time-Varying Parameter model, normalization of the latent variable) to refine and increase the measurement accuracy of each of the indirect methods considered. The temporal pattern of the shadow economy’s size that emerges from the different approaches is similar, which suggests that the estimates obtained are robust and capture the underlying dynamics of the hidden sector. After quantifying the shadow economy, we analyze its determinants by means of Bayesian Model Averaging techniques. We find that the evolution of the shadow economy in Navarre can be explained by a small and robust set of factors, specifically the tax burden, the share of employment in the construction sector, the inflation rate, euro area membership and the ratio of currency outside the banks to M1.

Interest on reserves, helicopter money and new monetary policy

We build a nonlinear dynamic model with currency, demand deposits and bank reserves. Monetary base is controlled by central bank, while money supply is determined by the interactions between central bank, commercial banks and public. In economic crises when banks cut loans, monetary policy following a Taylor rule is not efficient. Negative interest on reserves or forward guidance is effective, but deflation is still likely to be persistent. If central bank simultaneously targets both interest rate and money supply by a Taylor rule and a Friedman’s k-percent rule, inflation and output are stabilized. An interest rate rule policy is just a subset of a more general monetary policy framework in which central bank can move interest rate and money supply in every direction.

An Econometric Analysis of Tax Evasion and Its Consequences on Economic Performance

This study aimed to estimate the extent of tax evasion in Jordan based on a currency demand methodology, the results of the time series stationarity test showed that there was a time series to be non-stationary at the same degree, and the results of the co-integration test showed the existence of co-integration between the model variables, the size of tax evasion during the period 1980–2019 was estimated using the fully modified ordinary least squares method (FM-OLS).The results showed that the average rate of tax evasion as a percentage of (GDP) amounted to 2.7%, whereas it reached 16.7% of tax revenues, After the extent of tax evasion had been estimated, its impact on some macroeconomic variables was identified through the Toda and Yamamoto causality test, This test showed that tax evasion had an impact on the general consumer price index, GDP, tax revenues, public debt, both public and private investment, and both public and private consumption, Finally the study recommends that more attention should be paid to the tax evasion phenomenon by officials in charge of economic policies and tax administration in order to reduce tax evasion and its impact on the economic variables and, thus, achieve greater economic stability. Doi: 10.28991/esj-2021-01271 Full Text: PDF

Estimation of the size of tax evasion in Greece

The purpose of this paper is to estimate the extent of tax evasion in Greece for the period 1980-2018. For this estimation we have chosen to apply an indirect method of approach to the issue, as developed by Tanzi, based on the assumption that estimating the size of the shadow economy can lead us to a safe measurement of the extent of tax evasion. More precisely, through the Currency Demand approach which is based on the basic assumption that activities under the shadow economy constitute a direct response of taxpayers to the increased tax burden and also that cash is mainly used to conduct such transactions and of the wealth derived from them, the size of the shadow economy was determined using the method of the University of Leicester research team and then the level of tax evasion was assessed by imposing an annual tax rate on it as a ratio of total tax revenue to Gross Domestic Product. The results showed a significant increase of the size of tax evasion during the period considered, while the model estimation showed that most of the tax evasion came from direct taxation.

Intensity of Regulations as a Cause of the Informal Sector

It is argued in the literature that the intensity of regulations and control in an economy is a determinant of the informal sector which however is ignored in most of its estimates. This article uses a new variant of the currency demand approach where ‘unemployment’ and ‘intensity of government control’ are used to estimate a shadow economy, alongside a the traditional tax variable. We choose Pakistan since it has a significant share of its activities in the informal sector along with the history of various political and dictatorial regimes. Further, there are examples of bureaucratic control leading to corruption in the economy. It provides an opportunity to study the nexus between regulation intensity and informal economy and present a case study for other developing countries exercising control over the economy through the large size of its public sector. The results show that the intensity of the control variable has statistically and economically significant role in increasing the shadow economy, almost equivalent to the tax coefficient. Once the yearly variation in our estimates is mapped with various political regimes, it seems that the validity of estimates is reinforced considering policy inconsistencies and prominent events of each regime.