A SVAR Analysis of the Relationship between Romanian Unemployment Rates and the Size of the Shadow Economy

Keywords

Shadow economy, Unemployment rates, Structural VAR, Romania

Abstract

The paper analyses the relationship between shadow economy and unemployment rates using a Structural VAR approach for quarterly data during the period 2000-2010. The size of Romanian shadow economy is estimated using the currency demand approach based on VECM models, stating that its size is decreasing over the analyzed period, from 36.5% at the end of 2000 to about 31.5% of real GDP at the middle of 2010. The relationship between the variables is tested by imposing a long-run restriction in the Structural VAR model to analyze the impact of the shadow economy to a temporary shock in unemployment. The accumulated responses generated by a positive supply shock (unemployment rate) confirms that in the short-run, a rise in both registered and ILO unemployment rates in formal sector will lead to a decrease in the number of people who work in the shadow economy in the second quarter following the initial shock and to an smaller increase in the size of the Romanian shadow economy in the third quarter following the initial shock.

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