Vector Error Correction Estimation of the Ukrainian Shadow Economy Share Using Currency Demand Approach

In order to avoid the limitations of the available empirical informal sector estimation methods and the problem with availability and coherence in input data, Currency demand approach to shadow economy estimation is extended by evaluating a Vector Error Correction model for the Ukrainian economy, using monthly monetary statistics data. The possible critique of the choice of exogenous factors determining the shadow economy and influencing the currency demand is avoided by modelling only the endogenous relationship between the cointegrating time series, namely the logarithm of currency in circulation and the deposit interest rate. The model is proven to be dynamically stable with theoretically justified values of the estimated coefficient and suitable for further analysis.