THE IMPACT OF UNEMPLOYMENT RATE ON THE ROMANIAN SHADOW ECONOMY: AN EMPIRICAL INVESTIGATION USING GRANGER CAUSALITY ANALYSIS

The paper aims to estimate the size of the Romanian shadow economy (SE) in the period 1998Q1-2008Q4 using the currency demand approach and to evaluate if there is any relationship between the SE and unemployment rate (UR) in the case of Romania. In order to do that, we used the cointegration-based error correction mechanism in vector autoregression models. A special attention it was given to the problem of non-stationarity and cointegration. The results indicate that the shadow economy grows constantly during 1998-1999 until it reaches its maximum at the end of 1999(38.12% in 1999Q2). Then, it decreases slowly and stabilizes around 27% of official GDP. Evaluating the Granger causality relationship between the unemployment rate and the size of the shadow economy, the results support a unidirectional granger causality that runs only from the unemployment rate to the shadow economy. Using the generalized impulse response functions, the analysis leads to the finding that a 1% increase in the unemployment rate contributes to shadow economy decrease by 3.7% over the next 8 quarters.