Using currency demand to estimate the Palestine underground economy: An econometric analysis

Ibrahim M Awad,Wael Alazzeh

doi:10.1057/s41599-020-0433-4

Abstract

The existence of an underground economy may hide the official number of unemployed persons, their share in the labour force, and wages. It also gives rise to the economic and social conditions of individuals, household and countries, which are evaluated in a biased way if one relies on the official statistics. In this paper, we use the currency demand model of Tanzi to estimate the underground economy in Palestine over the period: (2008–2017). Toward that end, a group of econometric techniques of time series data was applied. The main empirical results show that the underground economy reached up to 28.6% in 2010 of the GDP with about USD 2676.227 million. The empirical study results also reveal that the explanatory variables listed in the study model suggested by economic theory and previous research have a significant impact on the dependent one, except the variable ratio of governmental wages and salaries to GDP. However, the money received by the government employees does not contribute to the underground economy.

Highlights

The existence of an underground economy may hide the official number of unemployed persons, their share in the labour force, and wages
Analysis and discussion of the Fully modified ordinary least squares (FMOLS) results To examine the main hypothesis of the study, the model of underground economy regression is used with considering the size of the underground economy as a dependent variable in Palestine, which is affected by independent variables according to the following (Carolina and Pau, 2007): LnðHEÞt 1⁄4 β0 þ β1*LnðT=YÞt þ β2*LnðW=YÞt þ β3*LnðRÞt þ β4*LnðSEÞt þ β5*LnðGDPPCÞt þ εt ð3Þ
Concluding remarks As aforesaid, the econometric results showed that all the variables have statistical function except the variable of the government salaries and wages which indicates that the value of salaries the workers in governmental gain do not contribute in the underground economy because of the low wages of workers of governmental sector and high cost of living

Summary

Introduction

The existence of an underground economy may hide the official number of unemployed persons, their share in the labour force, and wages. The underground economy is considered as an important source for job opportunities and diverse labour of children, women, youth, elderly, disabled increasing burdens of decision-makers who should necessarily take this kind of economy and its connections including health, provision of decent work social insurance and other benefits into consideration in planning. All of this sheds light on the nature of works and underground labourers and work environment that is placed outside legal and real structures and organizations. All the aspects of the concept of economic development will be clarified. so that the impacts of the size of the underground economy and to what extent they affect the Palestinian economy in general and economic development

Methods

Findings

Discussion

Conclusion