Kovaliovaitė, Artūra; Ziminskaja, Justyna
February 2015
Monetary Studies (Bank of Lithuania);Feb2015, Vol. 17-19 Issue 1, p24
Academic Journal
There is a need to gain a better understanding of the drivers behind the shadow economy and the means to contain it, as dealing with that would contribute to sustainable long term growth. Since the shadow activity by default lacks proper measurement and its definition in the literature may vary considerably, its unambiguous evaluation is difficult. The above mentioned difficulties notwithstanding, the main purpose of this article is to determine the size of the Lithuanian shadow economy by employing econometric techniques. In this article the link between the directly immeasurable shadow economy and the observed indicators is defined using the so-called MIMIC model. A relation between the shadow economy and budgetary tax revenues is further explored by applying the money demand model. In the article we discuss the definitions of the shadow economy. Applying methodology from the previous research we propose a version of MIMIC and money demand models for an analysis of the shadow economy in the Lithuanian case. We provide an analysis of the advantages and disadvantages of the model assumptions, check the robustness of the results and offer an interpretation of them. Finally, the estimates of the shadow economy levels produced by the two models are compared. The results of the MIMIC model suggest that a better condition of personal finances, labour market and overall economics is associated with a lower level of shadow economy activities in the labour market. With the help of the money demand model we show that the tax burden plays an important role in determining the choice between the legal and shadow labour market.


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