Shadow Economy, Economic Growth and Financial Development

Abstract This study investigates the association between the economic growth, the shadow economy, and financial development in 156 countries worldwide for the period between 1991 and 2015. The study employs two-panel approaches, the panel vector Autoregression, and Panel Quantile Regression. The result shows that economic growth has a negative effect on the shadow economy, while the financial development variables have an asymmetric effect on the shadow economy. On the other hand, the results show that the shadow economy effects economic growth positively and financial development negatively. Also, Panel Quantile Regression shows that economic growth and financial development significantly affect the shadow economy at different quantiles. The effect of economic growth on the shadow economy found as negative at all tested quantiles, while financial development variables vary across the quantiles.JEL:C50, E00, O11, O17