AN IMPROVEMENT OF THE TANZI METHOD FOR THE ESTIMATION OF ITALIAN UNGERGROUND ECONOMY

Abstract

This paper deals with the Tanzi method for the estimation of underground economy. The approach is discussed and modified. Refinements on the variables and on the econometric technique are proposed. The “adjusted” Tanzi method is then used to estimate the shadow economy in Italy along twenty-eight years. Despite the difficulty to obtain point estimates, interpretations of the results are nevertheless possible, trustworthy and interesting. For instance, the model detects the presence of underground economy, an expected finding. On the other hand the model shows no positive trend in the recent period. A very puzzling result, given the mainstream literature and the policymakers claims.Shadow economy, cointegration