Mimic Model: A Tool to Estimate the Shadow Economy

Abstract

Formal economy affects the Shadow economy. This is the reason why the study of shadow economy has attracted a lot of attention of academics and policy makers in recent years. Often, multiple indicators multiple causes (MIMIC) models is applied to time series data to estimate the size and development of the shadow economy for a particular site. This model gives us information about the relationship between cause and indicator variables and a latent variable, here the shadow economy, from covariance structures. Like most macroeconomic variables do not satisfy stationary, long run information is lost when employing first differences. Perhaps, this shortcoming is rooted in the lack of a suitable MIMIC model which considers cointegration among the variables. This paper presents the MIMIC model as an econometric model and then shows how these model coefficients are calculated. The paper also presents the connection that exists between the formal and the shadow economy. Using this model we will be demonstrating that this approach allows the applicant to obtain accurate estimates regarding the size of shadow economy.

DOI: 10.5901/ajis.2014.v3n6p295