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Is Informality a Barrier to Financial Development?

  • Ceyhun Elgin
  • Burak R. Uras

This study investigates the relationship between financial development and the size of the informal economy. We build a model in which an exogenous variation in the size of the informal sector creates two effects on financial development. Specifically, informal sector harms financial development through increasing financial repression due to tax evasion. However, on the other hand, increasing informal sector size facilitates financial development through easing the capacity constraint on the financial sector. Using a cross-country panel data set of 152 countries over the period 1999–2007 we also provide empirical support for the mechanism of our theory. Copyright The Author(s) 2013

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Paper provided by Bogazici University, Department of Economics in its series Working Papers with number 2012/12.

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Date of creation: Dec 2012
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Handle: RePEc:bou:wpaper:2012/12
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