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Dynamic Interactions Between the Shadow Economy and Economic Policy Uncertainty: A Panel Var Approach

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  • Irem Cetin

Abstract

The literature on economic uncertainty has focused on the effects of uncertainty on the formal economy. Still, it has not addressed a relationship between uncertainty and shadow economy until now, to our knowledge. Therefore, this paper analyses the dynamic relationship between economic policy uncertainty and the shadow economy using panel vector autoregression estimates exploiting a dataset for 21 countries from 1997-2018. The impulse response analyses in this context reveal a mutual interaction of policy uncertainty and the shadow economy. In this respect, not only is the shadow economy found to respond to shocks in economic policy uncertainty, but also the uncertainty in economic policy appears to increase by a response to shocks in the shadow economy, implying a feedback effect from informal economic activities towards uncertainty. This effect is also thought to be responsible for aggravating negative influences of uncertainty on formal economic activities.

Suggested Citation

  • Irem Cetin, 2024. "Dynamic Interactions Between the Shadow Economy and Economic Policy Uncertainty: A Panel Var Approach," Politická ekonomie, Prague University of Economics and Business, vol. 2024(3), pages 431-445.
  • Handle: RePEc:prg:jnlpol:v:2024:y:2024:i:3:id:1427:p:431-445
    DOI: 10.18267/j.polek.1427
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    References listed on IDEAS

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    1. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 11(2), pages 109-149, May.
    2. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2009. "How do institutions affect corruption and the shadow economy?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 773-796, December.
    3. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
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    5. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    6. World Bank, 2014. "World Development Indicators 2014," World Bank Publications - Books, The World Bank Group, number 18237.
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    More about this item

    Keywords

    Shadow economy; economic policy uncertainty; panel VAR;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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