Euro Switch and Shadow Economies

ABSTRACT

This paper studies the effect of euro adoption on the shadow economies of a group of European Union member countries using pooled mean group estimation. Controlling for macroeconomic factors and conducting several robustness checks, our results indicate that euro adoption has a negative association with the size of the shadow economy for this particular group of EU countries. We speculate this relationship may be due to increased transparency in financial markets, more government regulation post-euro adoption, or more legal-sector opportunities post-euro adoption. European countries considering euro adoption may find the results useful in making their final decision regarding currency adoption.

KEYWORDS:

• Euro
• pooled-mean group estimation
• shadow economies

JEL CLASSIFICATION:

• F0
• F4

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Stata’s xtpmg command is used to estimate pooled mean group models.

2. Except for the$euro$ dummy which is just included in equation 1(1) $Shado{w}_{it}=a_{0i}+a_{1i}re{g}_{i,t}+a_{2i}ef{f}_{i,t}+a_{3i}ta{x}_{i,t}+a_{4i}trad{e}_{i,t}+a_{5i}remi{t}_{i,t}+a_{6i}huma{n}_{i,t}+a_{7i}a{g}_{i,t}+a_{8i}gd{p}_{i,t}+{\phi }_{9i}euro+a_{10i}Shado{w}_{i,t-1}+{\epsilon }_{i,t}$(1) .

Additional information

Notes on contributors

Alexi Thompson

Alexi Thompson is an Associate Professor of Economics at South Carolina State University in Orangeburg, South Carolina. He has over 30 publications appearing in journals including Economics Letters, Energy Economics, and Journal of Economics and Finance, among others.