The impact of fiscal policy and deregulation on shadow economies in transition countries: The case of Ukraine

A model of Ukrainian shadow economy money demand is estimated that includes new regulatory burden, tax complexity, and soft-budget constraint variables. This model is analyzed to determine the causes and dynamics of the Ukrainian shadow economy and to assess the effectiveness of state measures undertaken to reduce its size. The direct tax burden, the broadly defined regulatory burden, the complexity of the tax system, and soft-budget constraints for enterprises are found to be important causes of unofficial activity. The main explanatory factors for the estimated decline of the shadow economy in recent years are explained and it is argued that the evidence has implications beyond the case of Ukraine.