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Military expenditures and shadow economy in the Baltic States: Is there a link?

Author

Listed:
  • Fedotenkov, Igor
  • Schneider, Friedrich

Abstract

The main goal of our paper is to determine the existence of a link between government (military) expenditures and the shadow economy in the Baltic States. The empirical investigation is done over the years 2003-2014 for Estonia, Latvia and Lithuania. We showed that there is a highly statistically significant positive dependence between the size of the shadow economy and military expenditures in the Baltic States. Our conclusion is that higher military expenditures indeed lead to a higher shadow economy and this result is robust to different model specifications. In order to demonstrate the importance of our highly statistically significant results we undertook a simulation where we calculated how much the size of the shadow economy would increase if the size of military expenditure as a percentage of GDP doubled: In Estonia such an expansion would have led to an increase in the size of the shadow economy from 27.1% to 30.1%, in Latvia from 24.7% to 26.1% and in Lithuania from 27.1% to 28.4% in 2014.

Suggested Citation

  • Fedotenkov, Igor & Schneider, Friedrich, 2017. "Military expenditures and shadow economy in the Baltic States: Is there a link?," MPRA Paper 76194, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:76194
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    File URL: https://mpra.ub.uni-muenchen.de/76194/1/MPRA_paper_76194.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Shadow economy; military expenditures; Baltic States;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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