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Is the shadow economy procyclical or countercyclical over the business cycle? International evidence

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  • Owolabi, Adegboyega O.
  • Berdiev, Aziz N.
  • Saunoris, James W.

Abstract

Using a panel of 123 countries observed from 1991 to 2017, this paper examines whether the shadow economy is procyclical or countercyclical over the business cycle. Specifically, we uniquely consider the influence of business cycle expansions (a rise in GDP per capita away from its long-term trend) and recessions (a decline in GDP per capita away from its long-term trend) on the underground sector, measured as the per capita growth rate of the shadow economy. Results show that the shadow sector exhibits countercyclical behavior over the business cycle, and this result is especially evident in non-OECD countries. Moreover, we find that the shadow economy is more responsive to business cycle expansions than recessions in the short run, while the response is symmetric in the long run. These findings are consistent with the underground sector functioning as an economic buffer to absorb the over or under capacity of the official sector.

Suggested Citation

  • Owolabi, Adegboyega O. & Berdiev, Aziz N. & Saunoris, James W., 2022. "Is the shadow economy procyclical or countercyclical over the business cycle? International evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 257-270.
    • Handle: RePEc:eee:quaeco:v:84:y:2022:i:c:p:257-270
    DOI: 10.1016/j.qref.2022.01.017
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    Cited by:

    1. Nguyen, Dinh Trung & Duong, Kim Thanh, 2024. "Financial stress and shadow economy: A global study from a new worldwide database," Finance Research Letters, Elsevier, vol. 60(C).
    2. Joseph Mawejje, 2024. "Government expenditure, informality, and economic growth: Evidence from Eastern and Southern African countries," African Development Review, African Development Bank, vol. 36(1), pages 125-138, March.
    3. Aziz N. Berdiev & Brandon Gomes & James W. Saunoris, 2023. "Revisiting the nexus between globalisation and the shadow economy: Untying the influences of de jure versus de facto globalisation," The World Economy, Wiley Blackwell, vol. 46(1), pages 27-54, January.
    4. Mohammed Nayel Abu Alfoul & Ibrahim Naser Khatatbeh & Fouad Jamaani, 2022. "What Determines the Shadow Economy? An Extreme Bounds Analysis," Sustainability, MDPI, vol. 14(10), pages 1-22, May.
    5. Gomez, Wilman & Castrillon, Cristian & Montoya, Jaime, 2024. "Sector informal como amortiguador del ciclo económico: el papel de la aversión a la pérdida," Borradores Departamento de Economía 100, Universidad de Antioquia, CIE, revised 05 Nov 2024.

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    More about this item

    Keywords

    Shadow economy; Business cycles; Asymmetric effects;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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