Estimating the size of the underground economy in Saudi: Evidence from Gregory-Hansen cointegration based currency demand approach

• Main Authors: Mohammed Gamal, Awadh Ahmed, Dahalan, Jauhari
• Format: Article
• Language: English
• Published: Pak Publishing Group 2015
• Subjects: HC Economic History and Conditions
• Online Access: http://repo.uum.edu.my/15494/1/12-3rdICEFMO-701-2015-%2873-87%29.pdf; http://repo.uum.edu.my/15494/; http://www.pakinsight.com/?ic=book_detail&id=11
• Institution: Universiti Utara Malaysia

The objective of this study is to estimate the extent of the underground economy, illegal currency and tax evasion in the Saudi economy over the period of 1980-2010.The study uses the Gregory and Hansen co integration test based on the recent form of the currency demand approach as a proxy to indirectly quantify the underground economy.The study's contribution is in contrast to previous studies that have linked the positive impact of money inflows to the demand for money as a measurement of the underground economy in the recipient economies.This study is the first to includes the variable of money outflows as an important factor that can be an index for the practice of individuals in the activities of the underground economy in the Saudi economy.The outcomes provide that the average size of the underground economy constituted 62.80% of the official GDP over the study period.The size was 64.25% of the official GDP in 1980 and 57.82% of the official GDP in 2010.However,the average size of the illegal money to the money outside banks reached about 18.18%.The rate of tax evasion to the official GDP has been fluctuating over the study period.It was 3.38% of the official GDP in 1980 and 2.53% of the official GDP in 2010. The high rates of tax evasion compared to the official GDP fluctuated from 7.53% in 1982 to 7.91% in 1990.Then, the rates declined, except for the year of 1998, where the rate was 7.21%.From the results, the plot of CUSUM and CUSUMSQ statistic tests for ln(M1) indicating that the model of Saudi money demand is stable over the study period.