Abstract
The paper estimates the size of the Shadow Economy (SE) in Ethiopia from 1995 to 2022 and rigorously tests the statistical relationships between the SE and various causal variables. In order to carry out the comprehensive econometric analysis, a multiple indicator multiple causes (MIMIC) model was effectively applied. The main causes of the Ethiopian SE are carefully analyzed, and several economic policies aimed at reducing it are thoughtfully suggested. An appraisal of the reliability of these estimates is conducted, along with an alternative benchmark strategy for the MIMIC approach that was proposed for enhanced accuracy. The findings reveal that the causal variables, including tax burden, inflation rate, trade openness, and economic freedom, significantly influence the shadow economy. Furthermore, it shows that indicator variables, such as currency in circulation and official economic growth rates, significantly indicate the presence and extent of a shadow economy. Thus, based on the insightful findings of the research, the author recommends that the government increase trade relations with the rest of the world and promote greater economic freedom. It also endorses adjusting inflation and tax burdens to effectively minimize the shadow economy in Ethiopia.
Published Version
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