The shadow economy in malaysia: evidence from anARDL model

In this study we estimate the size of the shadow economy in Malaysia for the period 1972-2012, using the Tanzi-type currency demand approach (CDA). We employ the autoregressive distributed lag (ARDL) bounds testing approach popularized by Pesaran, Shin, and Smith (2001) to ascertain the validity of the CDA model. The bounds test suggests that there exists a stable long-run relationship between currency demand and its determinants. We then relate the estimated size of the shadow economy in Malaysia with its determinants - income, tax burden and unemployment. Our results suggest that income has negative effect on shadow economy while tax burden and unemployment have positive impact on shadow economy in Malaysia