Measuring the Size of the Informal Economy in the Republic of Kosovo (2008-2018)

The informal economy was always present in the society but it was not studied thoroughly until the 70s. The occurrence of various economic events in the US and Europe at that time pushed scholars to investigate more on the informal activities. Various estimations were conducted in order to measure the size of the informal economy in different countries. Direct and indirect methods were used. Studies were conducted on the Balkans region and other Eastern European countries in transition but up to this date there wasn’t any measurement on the size of the informal economy in Kosovo. This study has attempted to estimate the size of the informal sector in the Republic of Kosovo from 2008-2018, using the Currency Demand Approach. The CDA is used in this study because it is well-documented, theoretically sound and can be easily put in a time-series setting. To measure the long-run relationship between the variables, this study has used vector error correction model (VECM). In addition to the standard explanatory variables that are usually used in the currency demand approach (Currency in circulation, Real GDP, Tax Revenues, normal interest rate) this study included remittances as variables because of their relevance in Kosovo’s economy. The results indicate a decreasing trend of the size of the informal economy in the Republic of Kosovo, although it is still big in size as a proportion of GPD. The results show that the size of the Informal Economy in the Republic of Kosovo from 2008-2018 is an average of 31.7% of the official recorded GDP