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Financial development and the shadow economy: A panel VAR analysis

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  • Berdiev, Aziz N.
  • Saunoris, James W.

Abstract

This paper examines the dynamic relationship between financial development and the shadow economy using data for 161 countries over the period 1960–2009. Specifically, we use a panel vector autoregression model to construct impulse response functions that illustrate the time path of one variable (e.g., the shadow economy) following an orthogonal shock to another variable (e.g., financial development). We find that financial development reduces the size of the shadow economy. Moreover, there is some evidence of reverse causality between these variables; namely, a shock to shadow economy inhibits financial development.

Suggested Citation

  • Berdiev, Aziz N. & Saunoris, James W., 2016. "Financial development and the shadow economy: A panel VAR analysis," Economic Modelling, Elsevier, vol. 57(C), pages 197-207.
    • Handle: RePEc:eee:ecmode:v:57:y:2016:i:c:p:197-207
    DOI: 10.1016/j.econmod.2016.03.028
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    More about this item

    Keywords

    Shadow economy; Financial development; Panel vector autoregression;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • G2 - Financial Economics - - Financial Institutions and Services
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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