A RE-EXAMINATION OF THE U.S. UNDERGROUND ECONOMY: SIZE, ESTIMATION, AND POLICY IMPLICATIONS

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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

How to cite this paper: Yu, J.-S. & Hassan, M. K. (2009). A re-examination of the U.S. underground economy: size, estimation, and policy implications. Corporate Ownership & Control, 7(2-2), 279-295. https://doi.org/10.22495/cocv7i2c2p4