The Economic Growth–Inflation–Shadow Economy Trilogy: Developed Versus Developing Countries

Abstract

This study investigates the nexus among the economic growth–inflation–shadow economy trilogy by including the role of political stability for a sample of 33 developed and 14 developing countries over the 2005–2016 period. For the OECD countries, our results showed a bidirectional nexus among economic growth and the size of the shadow economy while the causality running from economic growth to inflation, on the one hand, and from inflation to the informal economy, on the other hand, is unidirectional. As for the MENA panel, the relationship between inflation and the underground economy remains bidirectional, while the relationship running from inflation to economic growth, on the one hand, and from the informal economy to economic growth, on the other hand, is unidirectional. With the introduction of political stability, the nexus among the informal economy and the inflation in the OECD countries becomes unidirectional running from inflation to the shadow economy. However, in the case of MENA countries, controlling for political stability reduces the magnitude of the coefficient of the shadow economy on inflation. We note that with a low level of political stability, countries facing the large size of the informal sector will shift their financing from taxes to seigniorage.

KEYWORDS:

• Shadow economy
• economic growth
• inflation
• political stability

JEL CLASSIFICATIONS:

• E26
• E31
• O17
• O47

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Austria, Lithuania, Australia, the United States, Belgium, the United Kingdom, Italy, Sweden, Greece, Chile, Iceland, Spain, the Czech republic, Norway, Denmark, Slovak Republic, Estonia, Portugal, Finland, France, New Zealand, Germany, the Netherlands, Mexico, Slovenia, Luxembourg, Ireland, Hungary, Latvia, Poland, Canada, Korea, and Japan.

2 The United Arab Emirates, Algeria, Jordan, Egypt, Lebanon, Tunisia, Kuwait, Libya, Qatar, Morocco, Iran, Oman, Saudi Arabia, and Turkey.

Additional information

Notes on contributors

Nedra Baklouti

Nedra Baklouti holds PhD in Economics at the Faculty of Economics and Management of Sfax, Tunisia, and is currently a contractual assistant in Economics at the Department of Economics of the Faculty of Economics and Management of Sfax. Her research interests include Political economy, Economic Growth, applied economics, panel data econometrics and institutional analysis in developed and developing countries.

Younes Boujelbene

Younes Boujelbene is Professor in Economics at the Faculty of Economics and Management of Sfax, Tunisia. His research interest is in development economics, macroeconomics, corporate governance, public economics and economic policy modelling.