This research was supported by the Bogazici University Research Fund (Project No: 6345), for which the author is grateful.
Cyclicality of Shadow Economy†
Article first published online: 7 JAN 2013
Copyright © 2012 The Economic Society of Australia
Economic Papers: A journal of applied economics and policy
Volume 31, Issue 4, pages 478–490, December 2012
How to Cite
Elgin, C. (2012), Cyclicality of Shadow Economy. Economic Papers: A journal of applied economics and policy, 31: 478–490. doi: 10.1111/1759-3441.12011
- Issue published online: 7 JAN 2013
- Article first published online: 7 JAN 2013
- business cycles;
- informal sector;
- panel data;
This article investigates the behaviour of the size of the shadow economy over the business cycle. To this end, it uses a panel dataset of 152 countries and finds strong evidence towards the counter-cyclicality of the informal sector size, that is, the size of the shadow economy as a ratio of gross domestic product (GDP) is reduced in booms and becomes bigger in busts. Empirical results are robust to different econometric specifications. This has serious consequences over the business cycle as it implies that the presence of the shadow economy increases the amplitude of the business cycles.