In this study we discuss the detailed empirical and theoretical concepts which highlight the different causes and consequences of shadow economy. The thesis contains the joint modified approach used for the modelling of shadow economy of Pakistan, we have employed monetary approach and Multiple Causes and Multiple Indicators (MIMIC) model estimated by Structural equation modeling technique to estimate the size and dynamics of the underground activities. Currency demand model is estimated via ARDL approach; this method provides the point estimator of the underground economy in a base year then this point estimator will be incorporated in MIMIC model to get proper scale and for calibrations and benchmarking of shadow economy which prevails in the official economy and hidden from the authorities. This study contributed to the existing literature which incorporated time series analysis of MIMIC model, as some causes and indicators don’t fulfill the property of stationarities. We have estimated the long-run MIMIC model and Short-run MIMIC model including the Error Correction terms (ECM) after checking the cointegration relationship by Engle and Granger approach for the first time in Pakistan. The magnitude of the shadow economy is calculated by the best available econometrical tools which are available. The dimension of shadow economy varies from 50% in 1974 and 28% in 2015. The unusual decreasing trend in shadow economy can be witnessed in 1981-1985 and 1991-1995 due to declining in demand for cash, unemployment rate, and tax burden at the same time banking or financial sector development can be observed. Supervisor:- Dr. Ahsan Ul Haq Satti