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Income Inequality and Shadow Economy in the EU. A Panel Cointegration and Causality Analysis

In: Advances in Quantitative Economic Research

Author

Listed:
  • Simona-Gabriela Masca

    (Babeş-Bolyai University)

  • Madalina Drutu

    (Babeş-Bolyai University)

  • Andrada-Maria Pojoca

    (Babeş-Bolyai University)

Abstract

Current political and economic discourse in Europe is often animated by public concerns about the income gap between the rich and the poor on one hand, and the informal economy on the other hand. As researchers argue, the two phenomena do not produce independently; there is some connection between them. This study explores the interrelation between shadow economy and income inequality in the 28 European Union countries over the 2007–2017 period, by means of panel cointegration and causality tests. The hypothesis under test is that the two variables experience a long-term relationship and one of them is a predictor factor for the other. The results lead to the conclusion that there is a long-run relationship between income inequality and shadow economy in our panel. The VECM is estimated, concluding that income inequality does cause shadow economy in EU-28 countries, but shadow economy does not cause income inequality. Our findings are valid under robustness tests, guiding to important policy implications.

Suggested Citation

  • Simona-Gabriela Masca & Madalina Drutu & Andrada-Maria Pojoca, 2022. "Income Inequality and Shadow Economy in the EU. A Panel Cointegration and Causality Analysis," Springer Proceedings in Business and Economics, in: Nicholas Tsounis & Aspasia Vlachvei (ed.), Advances in Quantitative Economic Research, chapter 0, pages 513-529, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-98179-2_35
    DOI: 10.1007/978-3-030-98179-2_35
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    More about this item

    Keywords

    Income inequality; Shadow economy; Panel cointegration; Causality; JEL classification: H26; O15;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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