Using currency demand to estimate the Palestine underground economy: An econometric analysis

Abstract

The existence of an underground economy may hide the official number of unemployed persons, their share in the labour force, and wages. It also gives rise to the economic and social conditions of individuals, household and countries, which are evaluated in a biased way if one relies on the official statistics. In this paper, we use the currency demand model of Tanzi to estimate the underground economy in Palestine over the period: (2008–2017). Toward that end, a group of econometric techniques of time series data was applied. The main empirical results show that the underground economy reached up to 28.6% in 2010 of the GDP with about USD 2676.227 million. The empirical study results also reveal that the explanatory variables listed in the study model suggested by economic theory and previous research have a significant impact on the dependent one, except the variable ratio of governmental wages and salaries to GDP. However, the money received by the government employees does not contribute to the underground economy.