Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/226088
Authors: 
Cziraky, Dario
Gillman, Max
Year of Publication: 
2004
Series/Report no.: 
wiiw Balkan Observatory Working Papers 050
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.
Subjects: 
Shadow economy
endogenous growth
dynamic structural equation modelling
latent variables
JEL: 
E31
E13
O42
C31
C51
C52
Document Type: 
Working Paper

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