Unveiling the Informal Economy: An Augmented Factor Model Approach

May 31, 2024

Preview Citation

Format: Chicago

Jiaxiong Yao. Unveiling the Informal Economy: An Augmented Factor Model Approach, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Commodities, Consumption, Econometric analysis, Economic sectors, Electricity, Factor models, Informal economy, Monetary base, Money, National accounts

Keywords: Augmented factor model, Component analysis, Consumption, D. adding nighttime, Electricity, Factor models, Global, Indicators of the informal economy, Informal economy, Informality, MIMIC model, Monetary base, Nighttime Light, Survey data, WBES data

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/110
Stock No:

WPIEA2024110
ISBN:

9798400277160
ISSN:

1018-5941

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