A practical strategy to improve econometric modeling–a case study for informal economy on the Republic of Macedonia

Abstract

Abstract:Here we consider some proposals in the calculation of the shadow economy using linear models that involve if the number of data point is small and observables are highly dynamical. We firstly suggest checking for possible critical points in the series by testing a log-periodic fit to the data. To improve the results from the model, we used intervals that do not contain critical points. Next, the presence of regimes is analyzed by using empirical mode decomposition technique, and we estimate that the best truncated series to be used should exclude the edges of such regimes. In the case of short term regimes, we propose to use series in intervals that include many cycles. This technique worked for the calculation of informal economy in the Republic of Macedonia for the short period of [2004, 2016] but it is supposed to improve calculation for other similar cases as well.