The Relationship between GDP and the Size of the Informal Economy: Empirical Evidence for Spain
University of Leipzig, Faculty Papers No. 127
24 Pages Posted: 20 Oct 2013 Last revised: 25 Feb 2014
Date Written: February 25, 2014
Abstract
The empirical evidence on the linkage of the informal economy and GDP is ambiguous. It depends on the method used to estimate the size of the informal economy. I propose a common factor of the different approximations of the size of the informal economy as an alternative. Using Spain as an example I find that GDP Granger-causes informality, but not the other way around. I also find that positive GDP shocks induce positive and statistically significant responses of the size of the informal economy.
Keywords: Informal economy, dynamic factor model
JEL Classification: C38, O17
Suggested Citation: Suggested Citation