A note on investigating causal link between the hidden economy and real GDP in Taiwan, 1962-2001
- 2004
- p.545-54.
- Jan
In this study, we first re-estimate the size of the hidden economy based on Tanzi's (1983) currency-ratio approach for the first time in the Taiwan context covering such a long time period (1962-2001); second, we investigate time series properties of the estimated real hidden economy and real GDP, and third, we test the hypothesis of a long-run relationship and causal link between the estimated hidden economy and real GDP over this sample period. The test result indicates that these two variables are cointegrated with one vector indicating a long-run equilibrium relationship exists between-these two variables. Granger-causality test result based on vector error-correction model (VECM) suggests a bi-directional causality (feedback) between these two variables. This result poses a dilemma for Taiwan policy makers who wish to stimulate economic growth and also minimize the size of the "tax gap" in Taiwan over this sample period. - Reproduced.