Abstract
We adopt a long-run perspective to investigate the size of the shadow economy and explore the trends in this area. The analysis is based on a panel of peripheral EMU countries over the period 1965-2015. Our empirical approach relies on a multiple indicators and multiple causes (MIMIC) framework. This approach is a variant of structural equation modelling (SEM). We used two sets of variables, (i.e. potential determinants and indicator variables) to estimate an underlying (unobserved) index that measures the evolution of the shadow economy. Ascertaining the relative importance of the shadow economy enabled analysis of its relationship with other institutional and social issues (e.g. corruption, productivity and economic growth), and helped identify the channels through which the shadow economy might negatively influence the performance of different economies. In the sampled countries, shadow activity increased over the study period. It also seemed to be affected by the economic cycle.
Highlights
IntroductionDefining non-declared activities remains largely controversial in the academic literature
This paper provides fresh evidence to advance the debate on how to measure the shadow economy
We adopted a long-run perspective to analyse the dynamics of the shadow economy for the peripheral Economic and Monetary Union (EMU) countries of Portugal, Italy, Greece and Spain from 1965 to 2015
Summary
Defining non-declared activities remains largely controversial in the academic literature. Despite this controversy, non-declared activities are widely considered to include all legal production and provision of goods and services that are deliberately concealed from public authorities to avoid either tax or social security contributions or to avoid meeting certain legal standards or conforming to certain administrative procedures. Common practice is to report the size of the non-declared economy as a percentage of gross domestic product (GDP). This approach enables international and intertemporal comparisons by removing units of currency.
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