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, since each method includes some specific approach noise. I propose a common factor of four different informality measurement methods as a way of reducing the noise. Using Spain as an example I find that neither GDP Granger-causes informality nor informality Granger-causes GDP. If at all, GDP and informality only weakly respond to shocks of the other variable. The formal and informal economies in Spain seem to be rather independent arenas for economic exchange.
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Notes
See, for example, Soto (2000), Schneider (2005), Schneider et al. (2010) and Elgin and Oztunali (2012) for a worldwide analysis, Bajada and Schneider (2005) for the Asia-Pacific, De Soto (1989), Loayza (1996) and Perry et al. (2007) for Latin America, Eilat and Zinnes (2002) and Feige and Urban (2008) for transition countries and Bovi and Dell’ Anno (2010) and Feld and Schneider (2010) for OECD countries.
For a discussion on the most used definitions of informality in economics see Schneider and Enste (2000).
Martinez-Lopez (2013), for example, presents a recent study for Spain.
See the second-order condition of Elgin and Oztunali (2012, 8).
The maximum lag order was \(p_{\max }=q_{\max }=3\).
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Duarte, P. The relationship between GDP and the size of the informal economy: empirical evidence for Spain. Empir Econ 52, 1409–1421 (2017). https://doi.org/10.1007/s00181-016-1109-1
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DOI: https://doi.org/10.1007/s00181-016-1109-1