Estimating shadow economy and tax evasion in Romania. A comparison by different estimation approaches

Abstract The paper aims to estimate the size of shadow economy (SE) and tax evasion (TE) in Romania for the period 2000–2017. We apply different approaches – Multiple Indicator Multiple Cause (MIMIC) model for the estimation of the size of the SE and the currency demand approach for the estimation of TE – in order to lay emphasis on peculiarities of these two phenomena. Empirical analysis reveals that SE acts as a substitute to formal economy while tax evasion is complement to GDP. Policy implications are that, given the different causes behind these two phenomena, the importance and consequences of SE and TE change over business cycle and they require different policy measures.