To shrink or not to shrink? Shadow economy reversals around the world

Abstract

The relationship between shadow economy (SE) and development has been extensively researched. However, there is a lack of consensus on the factors that drive reversals. This paper examines the effect of SE reversals when government collections are affected to changes in productivity, business regulations and financial depth. To this end, drawing on González et.al. (2005; 2017) Panel Smooth Transition Regression (PSTR), we examine the rationale of exclusion and escape theories in Advanced (AE) and Emerging and Developing Economies (EMD). Results show that at a macroeconomic level, both perspectives coexist simultaneously.