Inflation and Endogenous Growth in Underground Economies
By: Cziraky, Dario.
Contributor(s): Gillman, Max.
Material type: BookSeries: wiiw Balkan Observatory Working Papers: 50Publisher: Wien : Wiener Institut für Internationale Wirtschaftsvergleiche (wiiw), 2004Subject(s): Shadow economy | endogenous growth | dynamic structural equation modelling | latent variablesClassification: E31 | E13 | O42 | C31 | C51 | C52 Online resources: Click here to access online Summary: 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.Item type | Current library | Call number | Status | Date due | Barcode | |
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Paper | WIIW Library | 50 (Browse shelf(Opens below)) | Available | 1000010003258 |
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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.