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Yasser Abdih and Leandro Medina

This study estimates the size of the informal economy, and the relative contribution of each underlying factor, for the Caucasus and Central Asia countries in 2008. Using a Multiple Indicator–Multiple Cause model, we find that a burdensome tax system, rigid labour market, low institutional quality, and excessive regulation in financial and product markets are determinant factors in explaining the size of the informal economy, which ranges from 26 per cent of GDP in Kyrgyz Republic to around 35 per cent of GDP in Armenia. Furthermore, the results show that higher levels of informality increase the levels of self-employment and the percentage of currency held outside the banking system.