Document Type : Research Paper

Authors

• Ali Ghanbari ¹
• Seyed Hadi Makhzan Moosavi ²

¹ Assistant Professor, Faculty of Economics, Tarbiat Modares University

² M.S. in Economic Sciences, Tarbiat Modares University

Abstract

The size of the underground economy (UE) is valuable information in the
formulation of macroeconomic and fiscal policy. According to the hidden nature of
underground economy, there will be a problem for studying and measuring it, therefore
methods of common measure have set about estimating these activities so that it will face
with exclusive assumptions. This study applies fuzzy set theory and fuzzy logic to construct
an annual time-series for the (unobservable) Iran UE over the period 19782006. Three
major factors affecting the size of the UE, the effective tax rate, unemployment rate and the
degree of government regulations, are used. The result of this study has been compared with
MMIC model. Although these two studies have different procedures, they have generally
defensive and almost similar results in underground economy. In the meanwhile the featured
phenomenon of fuzzy values show that it can present better patterns in underground
economy. The advantage of applying fuzzy logic is twofolds. First, it can avoid the complex
calculations in conventional econometric models. Second, fuzzy rules with linguistic terms
are easy for human to understand it.

Keywords

• Underground economy
• Fuzzy logic
• Effective tax rate
• Government regulations
• Unemployment rate