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Growing apart or moving together? Synchronization of informal and formal economy cycles

Author

Listed:
  • Ceyhun Elgin
  • M. Ayhan Kose
  • Franziska Ohnsorge
  • Shu Yu

Abstract

We study the degree of synchronization between formal- and informal-economy business cycles. Using a comprehensive database of informal activity that covers a wide range of informality measures from almost 160 countries over the 1990-2018 period, we report two major results. First, fluctuations in informal-sector output are strongly positively correlated with those in formal-sector output. In contrast, fluctuations in informal employment are largely uncorrelated with those in formal-sector output. Second, movements in the formal economy tend to spillover to the informal economy. Using a novel set of instrumental variables, we show that fluctuations in formal-sector output "cause" movements in informal-sector output.

Suggested Citation

  • Ceyhun Elgin & M. Ayhan Kose & Franziska Ohnsorge & Shu Yu, 2021. "Growing apart or moving together? Synchronization of informal and formal economy cycles," CAMA Working Papers 2021-77, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-77
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-08/77_2021_Elgin_Kose_Ohnsorge_Yu.pdf
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    Cited by:

    1. Ceyhun Elgin & M. ayhan Köse & Franziska Ohnsorge & Shu Yu, 2021. "Understanding Informality Abstract:," Working Papers 2021/03, Bogazici University, Department of Economics.
    2. Hapsari,Indira Maulani & Shu Yu & Pape,Utz Johann & Mansour,Wael, 2023. "Informality in Indonesia: Levels, Trends, and Features," Policy Research Working Paper Series 10586, The World Bank.
    3. Tommy Chrimes & Bram Gootjes & M. Ayhan Kose & Collette Wheeler, 2024. "The Great Reversal," World Bank Publications - Books, The World Bank Group, number 41403, April.
    4. Alfano, Maria Rosaria & Capasso, Salvatore & Ciucci, Salvatore & Spagnolo, Nicola, 2024. "The non-linear effect of income on the shadow economy," Socio-Economic Planning Sciences, Elsevier, vol. 95(C).
    5. Cephas Melchior Kuipou Mfo Talom & Luc Nembot Ndeffo, 2025. "The non-linear effect of foreign direct investment on the informal economy in sub-Saharan African countries: An approach using the Method of Moments Quantile Regression," Economics Bulletin, AccessEcon, vol. 45(2), pages 958-969.
    6. Kose, M. Ayhan & Elgin, Ceyhun & Ohnsorge, Franziska & Yu, Shu, 2021. "Understanding Informality," CEPR Discussion Papers 16497, C.E.P.R. Discussion Papers.
    7. Bechchani, Khalil, 2025. "Austerity reexamined: Uncovering the role of the shadow economy," Economic Analysis and Policy, Elsevier, vol. 85(C), pages 1291-1317.

    More about this item

    Keywords

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    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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