Vector Error Correction Estimation of the Ukrainian Shadow Economy Share Using Currency Demand Approach

Анотація

In order to avoid the limitations of the available empirical informal sector estimation methods and the problem with availability and coherence in input data, Currency demand approach to shadow economy estimation is extended by evaluating a Vector Error Correction model for the Ukrainian economy, using monthly monetary statistics data. The possible critique of the choice of exogenous factors determining the shadow economy and influencing the currency demand is avoided by modelling only the endogenous relationship between the cointegrating time series, namely the logarithm of currency in circulation and the deposit interest rate. The model is proven to be dynamically stable with theoretically justified values of the estimated coefficient and suitable for further analysis. Through historical decomposition, the upper-bound estimates of the size of Ukrainian shadow economy are obtained under the assumptions that all the currency demand unaffected by interest rate shocks is generated by informal economic activity; and that money velocity in the observed economy serves as an upper limit for the corresponding parameter of the informal sector in each time period. These estimates are found to be consistent with contemporary published studies of Ukrainian shadow economy. The proposed approach is considered useful for rapid informal sector estimations and provision of initial and boundary conditions for Multiple Causes – Multiple Indicators and Computable General Equilibrium models.Article received 30.04.2018

Класифікація

Ідентифікатори

Схожі роботи