DOI: 10.1016/j.qref.2022.01.017">

Is the shadow economy procyclical or countercyclical over the business cycle? International evidence

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The Quarterly Review of Economics and Finance


Using a panel of 123 countries observed from 1991 to 2017, this paper examines whether the shadow economy is procyclical or countercyclical over the business cycle. Specifically, we uniquely consider the influence of business cycle expansions (a rise in GDP per capita away from its long-term trend) and recessions (a decline in GDP per capita away from its long-term trend) on the underground sector, measured as the per capita growth rate of the shadow economy. Results show that the shadow sector exhibits countercyclical behavior over the business cycle, and this result is especially evident in non-OECD countries. Moreover, we find that the shadow economy is more responsive to business cycle expansions than recessions in the short run, while the response is symmetric in the long run. These findings are consistent with the underground sector functioning as an economic buffer to absorb the over or under capacity of the official sector.


J. W. Saunoris is a faculty member in EMU's Department of Economics.

*A. O. Owolabi is an EMU student.

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DOI: 10.1016/j.qref.2022.01.017