A Fuzzy Logic Approach to Modeling the Smuggling Index of Iran's Economy

The availability of data for the size of the “Smuggling volume” is important for macroeconomic policy. We use fuzzy set theory and fuzzy logic to construct an annual time-series for the (unobservable) Iran Smuggling Index over the period 1350 to 1385. Three input variables are used - the tax burden, unemployment rate and an index of the exchange rate gap (i.e. the gap between market and interbank rates). The resulting smuggling index time-series is compared with one previously constructed by the second author using a structural “Multiple Indicators, Multiple Causes” (MIMIC) model. The two approaches each yield sensible, but somewhat different, pictures of the Iran smuggling index over this period.