REVISITING THE RELATIONSHIP BETWEEN US SHADOW ECONOMY AND THE LEVEL OF UNEMPLOYMENT RATE USING BOUNDS TEST APPROACH FOR COINTEGRATION AND CAUSALITY

This paper aims to investigate the long-run equilibrium relationship and the direction of causality between US. shadow economy (SE) and unemployment rate (UR) using bounds test for co-integration and granger causality approach. The size of US. shadow economy (SE) is estimated using a Structural Equation Approach with quarterly data for the period 1980-2009. Thus, the shadow economy is modeled like a latent variable using a special case of the structural equation models-the MIMIC model. His dimension is decreasing over the last two decades. The empirical results reveal the existence of a long run relationship between the two variables. Furthermore, the Granger causality test identifies a unique direction of causality that runs from unemployment rate to shadow economy but only in the short term.