Mimic Models, Cointegration and Error Correction: An Application to the French Shadow Economy

33 Pages Posted: 23 Jan 2008

See all articles by Andreas Buehn

Andreas Buehn

University of Cooperative Education Bautzen

Friedrich Schneider

Johannes Kepler University Linz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)

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Date Written: January 2008

Abstract

The analysis of economic loss attributed to the shadow economy has attracted much attention in recent years by both academics and policy makers. Often, multiple indicators multiple causes (MIMIC) models are applied to time series data estimating the size and development of the shadow economy for a particular country. This type of model derives information about the relationship between cause and indicator variables and a latent variable, here the shadow economy, from covariance structures. As most macroeconomic variables do not satisfy stationarity, long run information is lost when employing first differences. Arguably, this shortcoming is rooted in the lack of an appropriate MIMIC model which considers cointegration among variables. This paper develops a MIMIC model which estimates the cointegration equilibrium relationship and the error correction short run dynamics, thereby retaining information for the long run. Using France as our example, we demonstrate that this approach allows researchers to obtain more accurate estimates about the size and development of the shadow economy.

Keywords: shadow economy, tax burden, regulation, unemployment, cointegration, error correction models, MIMIC models

JEL Classification: O17, O5, D78, H2, H11, H26

Suggested Citation

Buehn, Andreas and Schneider, Friedrich G., Mimic Models, Cointegration and Error Correction: An Application to the French Shadow Economy (January 2008). CESifo Working Paper No. 2200, Available at SSRN: https://ssrn.com/abstract=1086586

Andreas Buehn

University of Cooperative Education Bautzen ( email )

Loebauer Strasse 1
Bautzen, 02625
Germany

Friedrich G. Schneider (Contact Author)

Johannes Kepler University Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz, 4040
Austria
+43 732 2468 8210 (Phone)
+43 732 2468 8208 (Fax)

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