How Strongly the Hidden Economy of a Small Country can be Influenced by Drastic Events: Case of Macedonia

Hidden economy presents a big concern for both developing and developed countries. Of particular interest is precise determination of the temporal pattern of hidden for small developing economies, which exhibit many peculiarities. Several methods for estimation of hidden economy are effectively used in economic research. Appropriate model based on some of these methods for small developing economies is required. Modified electric energy household consumption model is proposed in this work. Using this model, temporal variations of hidden economy in Republic of Macedonia were calculated for the period 1992-2014. For the sub-period 1999-2007 the obtained values are in excellent agreement with values reported in literature obtained by dynamic multiple indicators multiple causes method, proving that the method proposed in this work produces highly relevant results. Thus obtained temporal pattern of the hidden economy in Macedonia, using deconvolution in Gaussians, is described by five contributions: baseline at 32% and four Gaussian peaks corresponding to hyperinflation, Kosovo conflict, security crisis in Macedonia and banking crisis. After the expiration of the effects of these shocks, hidden economy approaches the baseline at about 32 %. It is proposed to use this modified method for estimating size of hidden economy in various small economies.