Inflation and endogenous growth in underground economies

Gillman, Max and Cziraky, Dario 2003. Inflation and endogenous growth in underground economies. The wiiw Balkan Observatory Working Papers, vol. 50. Vienna: The Vienna Institute for International Economic Studies. Available at: http://balkan-observatory.net/wp/2004%2006%20wiiw%...

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Abstract

The paper examines the effect of inflation on the growth rate in economies with underground, or ”non-market”, sectors. The model incorporates a non-market good into an endogenous growth cash-inadvance economy with human capital. Taxes on labor and capital induce substitution into the non-market sector which avoids such taxes. However the non-market sector uses only cash for exchange and cannot avoid the inflation tax, while the market sector allows costly credit use. We estimate a MIMIC model for latent underground economy using monthly data for Bulgaria, Croatia and Romania. Furthermore, we estimate a dynamic structural equation model and investigate short-run effects of the underground economy on output growth and test for Granger causality and long-run cointegrating relationships using bivariate Granger-causality tests and Johansen’s maximum likelihood technique. The result indicate different shares of underground economies across the three countries and a positive long-run effect of underground economy on output growth.

Item Type:	Monograph (Other)
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HC Economic History and Conditions
Publisher:	The Vienna Institute for International Economic Studies
Last Modified:	19 Mar 2016 23:24
URI:	https://orca.cardiff.ac.uk/id/eprint/50315

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