Scholarly Comments on Academic Economics

Response to “Comment on Measuring the Size of the Shadow Economy Using a Dynamic General Equilibrium Model with Trends”

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Abstract

It has been brought to our attention that the method proposed by our paper (Solis-Garcia and Xie 2018) fails to accomplish its goal. While we regret the mathematical error in our original calculation, we show that the claim made by Manuel Gómez and Adrián Ríos-Blanco (2022) of our method not serving its purpose is unfounded. We revisit our procedure, retaining the same DGE model and approach found in the 2018 paper, but using only a subset of the equilibrium conditions to pin down the dynamics of the informal sector. Our revised method generates a non-constant shadow-to-formal output ratio, and our results are consistent with alternative measures of the shadow economy. Thus, the findings from our 2018 paper—where our method offers the ability to generate time series over arbitrary time horizons—are nonetheless preserved in this updated approach.

This article is a response to Comment on Measuring the Size of the Shadow Economy Using a Dynamic General Equilibrium Model with Trends by Manuel A. Gómez and Adrián Ríos-Blanco (EJW, March 2022).