A Re-Examination of the U.S. Underground Economy: Size, Estimation, and Policy Implications

Networks Financial Institute Working Paper 2010-WP-04

41 Pages Posted: 9 Nov 2010

See all articles by M. Kabir Hassan

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Jung-Suk Yu

School of Urban Planning & Real Estate Studies, Dankook University

Date Written: November 1, 2010

Abstract

We re-examine the size of the underground economy in the U.S. between 1972 and 2006, after properly adjusting for several statistical issues relating to its estimation. The dynamic error-correction-based currency demand approach confirms that income tax rates have no contemporaneous effect on currency demand, but they have positive and significant effects with a one-period lag. In addition, we observe that the size of the underground economy in the U.S. has grown considerably during the post-1990 period from $148.7 billion (3.4% of official GDP) in 1973 to $691.2 billion (6.0% of official GDP) in 2006. We also find that misspecified models have a propensity for overstating the size of the underground economy. During recessionary periods, the underground and official economies move in a same direction, although the growth rates of the underground economy are more unpredictable than those of the official economy.

Keywords: Underground economy, currency demand method, error correction model, non-stationarity with unit roots, serial correlations

JEL Classification: C32, E26, E41

Suggested Citation

Hassan, M. Kabir and Yu, Jung-Suk, A Re-Examination of the U.S. Underground Economy: Size, Estimation, and Policy Implications (November 1, 2010). Networks Financial Institute Working Paper 2010-WP-04, Available at SSRN: https://ssrn.com/abstract=1705303 or http://dx.doi.org/10.2139/ssrn.1705303

M. Kabir Hassan (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Jung-Suk Yu

School of Urban Planning & Real Estate Studies, Dankook University ( email )

152, Jukjeon-ro, Suji-gu, Yongin-si
Gyeonggi-do, 16890
Korea, Republic of (South Korea)

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