Unveiling the Informal Economy: An Augmented Factor Model Approach

Unveiling the Informal Economy: An Augmented Factor Model Approach
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Volume/Issue: Volume 2024 Issue 110
Publication date: May 2024
ISBN: 9798400277160
$20.00
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Topics covered in this book

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Economics- Macroeconomics , Money and Monetary Policy , Economics / General , Informality , augmented factor model , MIMIC model , survey data , indicators of the informal economy , WBES data , D , adding nighttime , nighttime Light , component analysis , Informal economy , Factor models , Monetary base , Electricity , Consumption , Global

Summary

This paper develops a new approach to estimating the degree of informality in an economy. It combines direct yet infrequent measures of the informal economy in micro data with an augmented factor model that links macro indicators of the informal economy to its causes. We show that the prevailing model used in the literature, the multiple indicators multiple causes model, is a special case of the augmented factor model and depicts an incomplete picture of the informal economy. Using the augmented factor model approach, we show that the dynamics of the informal economy is shaped by the strength of overall economic activity as well as the interplay between the formal and informal economies. Contrary to previous work that typically finds declining informality for most countries, we find that the degree of informality has increased for low-income countries for the past two decades.