Black Economy, Financial Inclusion, Financial Liberalization Nexus: A Panel Analysis of Developing Countries

This study has examined the impact of financial liberalization and financial inclusion on the black economy in the case of developing countries from 2004 to 2019. The black economy is selected as an explained variable, whereas financial inclusion, financial liberalization, tax collection, level of corruption and political instability are selected as explanatory variables. Panel unit root issue has been checked with the help of PP-Fisher Chi-square (PP-FC), ADF-Fisher Chi-square (ADF-FC), Im, Pesaran, and Shin W-stat (IPSW), and Levin, Lin & Chu t* (LLC) unit root tests. The fixed-effect model has been used for examining the dependence of the black economy on selected explanatory variables. Panel Granger causality test has been applied for checking the causal relationship among the selected variables. The results show that financial liberalization has a negative and insignificant impact on the black economy. Financial inclusions, the level of corruption, and political instability have a positive and significant impact on the black economy. Tax collection has a negative and significant impact on the black economy. The results of the causality test show that most of the variables have unidirectional causality between each other. Based on estimated results, the developing countries should control corruption, political instability, hence level of financial inclusion and tax collection for the reduction of the black economy