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Analyzing the Drivers of the Shadow Economy for the Case of the CESEE Region

Author

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  • Aysel Amir

    (Eastern Mediterranean University, Department of Banking and Finance)

  • Korhan GökmenoÄŸlu

    (Ankara HBV University, Department of Finance and Banking)

Abstract

This study explores the influence of financial development on the shadow economy, alongside other possible determinants, for the CESEE region. To this objective, we used a panel dataset of annual figures for eleven CESEE countries from 2003 to 2019. To estimate the long-run coefficients, panel FMOLS and DOLS were employed. Our findings suggest that an increase in financial development and tax burden leads to the enlargement of the shadow economy. While improvements in institutional quality, trade openness, and economic freedom reduce the magnitude of the shadow economy. The study’s results offer various policy recommendations that can be used to combat the shadow economy in CESEE countries. Tax policy and institutional reforms are encouraged to pro-mote greater trust within institutions, enabling the shift of economic activities from the shadow to the formal economy.

Suggested Citation

  • Aysel Amir & Korhan GökmenoÄŸlu, 2023. "Analyzing the Drivers of the Shadow Economy for the Case of the CESEE Region," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 71(2), pages 155-181, February.
    • Handle: RePEc:sav:journl:v:71:y:2023:i:2:p:155-181
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    More about this item

    Keywords

    shadow economy; financial development; FMOLS; DOLS; transition economies;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H29 - Public Economics - - Taxation, Subsidies, and Revenue - - - Other
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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