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Hide and seek: IMF intervention and the shadow economy

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  • Chletsos, Michael
  • Sintos, Andreas

Abstract

By explicating the mechanisms through which International Monetary Fund (IMF) programs operate, this study investigates the effect of IMF intervention on the shadow economy. Using a sample of 141 countries from 1991 to 2014, we examine the impact of both IMF participation and conditionality on the informal economy. Our analyses address sources of endogeneity related to, first, the IMF participation decision and, second, the conditions included within the program. The empirical findings suggest that both IMF program participation and conditionality increase the size of the shadow economy. Disaggregating IMF conditions into structural and quantitative shows that only structural conditions are significantly related to a larger shadow economy both in the short- and long-term. Financial development can reduce the size of the shadow economy, yet it cannot reverse the detrimental effect of IMF conditions. Our initial results are found to be robust across alternative empirical specifications.

Suggested Citation

  • Chletsos, Michael & Sintos, Andreas, 2021. "Hide and seek: IMF intervention and the shadow economy," Structural Change and Economic Dynamics, Elsevier, vol. 59(C), pages 292-319.
    • Handle: RePEc:eee:streco:v:59:y:2021:i:c:p:292-319
    DOI: 10.1016/j.strueco.2021.09.008
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    11. Friedrich SCHNEIDER, 2016. "Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions," Turkish Economic Review, KSP Journals, vol. 3(2), pages 256-280, June.
    12. Imamoglu, Hatice, 2017. "Estimating the roles of financial sector development and international trade openness in underground economies: Evidence from the European Union," Economics Discussion Papers 2017-50, Kiel Institute for the World Economy (IfW Kiel).
    13. Imamoglu, Hatice, 2021. "The role of financial development on the underground economy in regards to Europe’s 2020 strategy," Economic Systems, Elsevier, vol. 45(2).
    14. Owolabi, Adegboyega O. & Berdiev, Aziz N. & Saunoris, James W., 2022. "Is the shadow economy procyclical or countercyclical over the business cycle? International evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 257-270.
    15. Feige, Edgar L., 2015. "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”?," MPRA Paper 68466, University Library of Munich, Germany.
    16. Bernhard Reinsberg & Thomas Stubbs & Alexander Kentikelenis, 2022. "Compliance, defiance, and the dependency trap: International Monetary Fund program interruptions and their impact on capital markets," Regulation & Governance, John Wiley & Sons, vol. 16(4), pages 1022-1041, October.
    17. Joseph Keneck-Massil & Alphonse Noah, 2019. "Shadow economy and educational systems in Africa," Economics Bulletin, AccessEcon, vol. 39(2), pages 1467-1478.
    18. Schneider, Friedrich, 2014. "The Shadow Economy and Shadow Labor Force: A Survey of Recent Developments," IZA Discussion Papers 8278, Institute of Labor Economics (IZA).
    19. Aziz N. Berdiev & James W. Saunoris & Friedrich Schneider, 2018. "Give Me Liberty, or I Will Produce Underground: Effects of Economic Freedom on the Shadow Economy," Southern Economic Journal, John Wiley & Sons, vol. 85(2), pages 537-562, October.
    20. Aziz N. Berdiev & James W. Saunoris, 2023. "The case for independence: Does central bank independence curb the spread of the underground economy?," Kyklos, Wiley Blackwell, vol. 76(3), pages 407-435, August.

    More about this item

    Keywords

    Shadow economy; IMF programs; Conditionality; Structural adjustment; World sample;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

    Statistics

    Access and download statistics

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