TY - JOUR
T1 - The shadow economy and sustainable development
T2 - The role of financial development
AU - Gharleghi, Behrooz
AU - Jahanshahi, Asghar Afshar
N1 - Publisher Copyright:
© 2020 John Wiley & Sons, Ltd
PY - 2020/8/1
Y1 - 2020/8/1
N2 - This paper provides fresh evidence concerning the threshold relationship between the shadow economy and financial development. Shadow economy is quoted as an obstacle to sustainable development and therefore the role of financial development is examined in this paper to tackle the issue of shadow economy. It is based on panel data of 29 developed and developing countries over the period of 1975–2015 and use of panel threshold model. Three proxies for financial development—liquid liabilities, private credit to deposit money banks, and stock market capitalisation—were utilised to obtain the threshold value of US$33,600 Gross Domestic Product (GDP) per capita. This threshold helps to determine the impact of financial development on the size of the shadow economy. Empirical results suggest that above this threshold, financial development significantly contributes to the reduction in size of the shadow economy while it has no impact for countries that have per capita income below this threshold. This implies that, countries with lower per capita income (below $33,600) should implement policies to improve accessibility to finance and credit market which leads to a sufficiently higher per capita income that in turn allows for a reduction in the size of the shadow economy.
AB - This paper provides fresh evidence concerning the threshold relationship between the shadow economy and financial development. Shadow economy is quoted as an obstacle to sustainable development and therefore the role of financial development is examined in this paper to tackle the issue of shadow economy. It is based on panel data of 29 developed and developing countries over the period of 1975–2015 and use of panel threshold model. Three proxies for financial development—liquid liabilities, private credit to deposit money banks, and stock market capitalisation—were utilised to obtain the threshold value of US$33,600 Gross Domestic Product (GDP) per capita. This threshold helps to determine the impact of financial development on the size of the shadow economy. Empirical results suggest that above this threshold, financial development significantly contributes to the reduction in size of the shadow economy while it has no impact for countries that have per capita income below this threshold. This implies that, countries with lower per capita income (below $33,600) should implement policies to improve accessibility to finance and credit market which leads to a sufficiently higher per capita income that in turn allows for a reduction in the size of the shadow economy.
UR - http://www.scopus.com/inward/record.url?scp=85082312367&partnerID=8YFLogxK
U2 - 10.1002/pa.2099
DO - 10.1002/pa.2099
M3 - Article
AN - SCOPUS:85082312367
SN - 1472-3891
VL - 20
JO - Journal of Public Affairs
JF - Journal of Public Affairs
IS - 3
M1 - e2099
ER -