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A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?

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Abstract

The shadow economy is a complex phenomenon present, to a large extent, in the developing, and the developed countries. This study builds a dynamic simultaneous equation model that establishes an inter-connection between economic growth and the shadow economy for 17 developing and 33 developed countries over the 2005–2015 period. Using the data of the shadow economy size from Medina and Schneider (2018), we found that the relationship between economic growth and the underground economy is unidirectional in the MENA countries, but it is bidirectional in the OECD countries. The results also suggested that institutional quality interacts strongly with the relationship between economic growth and the underground economy. More specifically, we found that a higher GDP per capita is associated with a smaller shadow economy in countries with a good institutional quality. However, in countries where institutional quality is low, the increase of GDP per capita does not influence the size of the underground economy.

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Acknowledgements

The authors would like to express gratitude to the editor and anonymous referees for their insightful comments and suggestions which were useful in improving the quality of this paper.

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Authors and Affiliations

  1. Unit of Research in Applied Economics, URECA, Faculty of Economics and Management, University of Sfax, Sfax, Tunisia

    Nedra Baklouti

  2. Faculty of Economics and Management, University of Sfax, Sfax, Tunisia

    Younes Boujelbene

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  1. Nedra Baklouti
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  2. Younes Boujelbene
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Correspondence to Nedra Baklouti.

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Baklouti, N., Boujelbene, Y. A simultaneous equation model of economic growth and shadow economy: Is there a difference between the developed and developing countries?. Econ Change Restruct 53, 151–170 (2020). https://doi.org/10.1007/s10644-018-9235-8

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