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Public Debt, Sovereign Default Risk and Shadow Economy

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  • Ceyhun Elgin
  • Burak R. Uras

Abstract

This paper analyzes the interactions between government's indebtedness, sovereign default risk and the size of the informal sector. We test an underlying theory that suggests that in societies with limited tax enforcement, the presence of informality constrains the set of pledgeable fiscal policy alternatives, increases public debt and the implied probability of sovereign debt restructuring. The hypotheses that we test in our empirical analysis are: a larger size of the informal sector is associated with (1) higher public indebtedness, (2) higher interest rates paid on sovereign debt, (3) a higher level of financial instability and (4) a higher probability of sovereign default. The empirical results from cross-country panel regressions show that after controlling for previously highlighted variables in the literature that could explain the variation in financial instability, sovereign default risk and public indebtedness, the size of informality remains as a significant determinant of these variables.
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Suggested Citation

  • Ceyhun Elgin & Burak R. Uras, 2012. "Public Debt, Sovereign Default Risk and Shadow Economy," Working Papers 2012/10, Bogazici University, Department of Economics.
  • Handle: RePEc:bou:wpaper:2012/10
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    References listed on IDEAS

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    Cited by:

    1. Gerasimos T. Soldatos, 2016. "An Anti-Austerity Policy Recipe Against Debt Accumulation in the Presence of Hidden Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 6(2), pages 90-99, February.
    2. Antonio Afonso & Jose Alves, 2015. "The Role of Government Debt in Economic Growth," Hacienda Pública Española, IEF, vol. 215(4), pages 9-26, December.
    3. Salvatore Capasso & Stefano Monferrà & Gabriele Sampagnaro, 2015. "The Shadow Economy and Banks’ Lending Technology," CSEF Working Papers 422, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    4. González-Fernández, Marcos & González-Velasco, Carmen, 2014. "Shadow economy, corruption and public debt in Spain," Journal of Policy Modeling, Elsevier, vol. 36(6), pages 1101-1117.
    5. Tomas Lichard & Jan Hanousek & Randall K. Filer, 2012. "Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation," Economics Working Paper Archive at Hunter College 438, Hunter College Department of Economics.
    6. Miroslava Kostova Karaboytcheva & Carolina Silva Cassorla, 2015. "The shadow economy: a relevant factor for investment decisions in selected European Union countries," Financial Theory and Practice, Institute of Public Finance, vol. 39(3), pages 305-323.
    7. Tausch, Arno & Heshmati, Almas, 2014. "Testing an EU-Candidate's Place on the Maps of Global Economic, Political and Social Values: The Case of Turkey," IZA Discussion Papers 8163, Institute for the Study of Labor (IZA).
    8. Adom, Philip Kofi, 2016. "The DDT Effect: The case of Economic Growth, Public Debt and Democracy Relationship," MPRA Paper 75022, University Library of Munich, Germany, revised 11 Nov 2016.
    9. Ben Ali Mohamed Sami & Sassi Seifallah, 2016. "The corruption-inflation nexus: evidence from developed and developing countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 16(1), pages 125-144, January.
    10. Goel, Rajeev K. & Nelson, Michael A., 2016. "Shining a light on the shadows: Identifying robust determinants of the shadow economy," Economic Modelling, Elsevier, vol. 58(C), pages 351-364.
    11. Sami Saafi & Meriem Haj mohamed & Abdeljelil Farhat, 2015. "Is there a causal relationship between unemployment and informal economy in Tunisia: evidence from linear and non-linear Granger causality," Economics Bulletin, AccessEcon, vol. 35(2), pages 1191-1204.
    12. Soldatos, Gerasimos T., 2015. "An Anti-Austerity Policy Recipe against Debt Accumulation in the Presence of Hidden Economy," MPRA Paper 69911, University Library of Munich, Germany.
    13. Markellos, Raphael N. & Psychoyios, Dimitris & Schneider, Friedrich, 2016. "Sovereign debt markets in light of the shadow economy," European Journal of Operational Research, Elsevier, vol. 252(1), pages 220-231.
    14. Clark, Ephraim & Kassimatis, Konstantinos, 2015. "Macroeconomic effects on emerging-markets sovereign credit spreads," Journal of Financial Stability, Elsevier, vol. 20(C), pages 1-13.

    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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