Exploring and Estimating the Size of Shadow Economy by Using Monetary Approach: Case Study of Pakistan

Abstract

The core purpose of present article is to explore and estimate the size of Shadow Economy of Pakistan. The study used annual Time series data from time span of 1980 to 2018. The present research introduced Lending Interest Rate as additional variable for the very first time to estimate the Shadow or dim Economy. The study also focused on Currency Demand Approach (CDA) which is the best way of estimation the size of S.E. The results of ARDL, Unit Root Test (ADF) and Bound Test have also generated for the purpose. The study investigated positive relationship between Currency Circulation to Money Supply Ratio and GDP, Inflation, Interest rate and Total Tax Revenue through ARDL and estimated the required Shadow Economy. The study also explored the Shadow Economy. The study also explored the Shadow Economy of Pakistan and estimated the size of S.E. Size of tax evasion community has also derived by present research which represent that taxes are not the only measures of Shadow Economy.