Causality between the measured and underground economies in New Zealand

We investigate some characteristics of the underground economy in New Zealand by testing for Granger causality between measured and 'hidden' real GDP in that country. We find clear evidence of causality from measured to hidden economic activity, but only weak evidence of causality in the reverse direction. This poses a dilemma for policy makers who wish to stimulate economic growth and also minimize the size of the 'tax gap'.