Growth in the shadows: Effect of the shadow economy on U.S. economic growth over more than a century: Growth and shadow economy

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Contemporary Economic Policy


Taking a long-term look at U.S. economic growth over 1870–2014, this paper focuses on the spillovers from the shadow or the unofficial economy to growth in the official sector. Shadow activities might spur or retard economic growth depending on their interactions with the formal sector and impacts on the provision of public goods. Nesting the analysis in a standard neoclassical growth model, we use a relatively new time series technique to estimate the short-run dynamics and long-run relationship between economic growth and its determinants. Results suggest that prior to World War II (WWII) the shadow economy had a negative effect on economic growth; however, post-WWII the shadow economy was beneficial for growth. The sanding effect of the shadow economy in the earlier period is especially robust to alternate considerations of possible endogeneity and an alternate set of growth determinants. (JEL E26, O43, O51, K42).

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