Estimating the Underground Economy in Iran (1965-2005): A MIMIC Approach

Abstract

This study uses " Multiple Indicators â Multiple Causes" (MIMIC) approach to model the causal relations between main variables, which determine the underground economy in Iran. we Basically, it examines the relationship between underground and official GDP in Iran, using annual time-series data for Iran during 1965 â 2005. Accordingly, it is found that the estimated size of the underground economy varies from 6.24 percent in 1965 to 26.15 percent of the formal economy in 2005, while the related minimum and maximum values were 5.50 and 27.76 percent of the economy in 1967 and 2001, respectively. The underground economy is significantly and positively affected by variables such as unemployment and inflation, but negatively by the degree of economic openness. JEL Classification: E26 Ø O17 Ø H26