Estimating the Black Economy through Monetary Approach: A Case Study of Pakistan

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In recent years, the ‘black economy’ has held enormous appeal for policy makers. The presence of the black economy creates critical misrepresentation of macroeconomic variables in official estimates which lead to false determination and delusional impact of economic policies. Similarly, the black economy represents the unrecorded potential of the economy vis-à-vis resource generation and mobilization. The economy of Pakistan has undergone several minor tax reforms since the 1960s. However, the tax and tariff reform during the 1990s, exercised under international pressure, can be regarded as the first comprehensive exercise of its kind and therefore, it becomes highly desirable to gauge its impact on the black economy and on tax evasion practices. This paper, with some modifications, uses the standard monetary approach to obtain the latest estimates of the size of the black economy and its macroeconomic implications thereof