Do financial technology and financial development lessen shadow economy? Evidence from BRICST economies using heterogenous bootstrap panel causality

Abstract

This study examined the role of financial technology (FinTech) and financial development in determining the shadow economy in the BRICST countries, using data from 2004 to 2018. The study also analyzed the moderating impact of financial technology on the financial development and shadow economy nexus. The study employed Breusch-Pegan LM (1980) and Pesaran (2004) tests for investigating cross-sectional dependency, followed by Pesaran's (2007) CADF panel unit root test. The study applied Westerlund's (2007) panel cointegration and CS-ARDL approach for examining cointegration and estimating long-run relationships. Moreover, Konya's (2006) panel causality is also applied to examine the possible causal relationship among the variables. The study explored that financial sector development and using financial technology are negatively related to the shadow economy. The study also found the significant moderating role of financial technology in the financial development and shadow economy nexus. Furthermore, the results highlighted a bidirectional causal relationship between economic growth and the shadow economy in South Africa, India, and Russia. A bidirectional causality between financial technology and the shadow economy is also identified in India and Russia. Finally, based on empirical results, financial development, and technology-related policies are suggested for policymakers to curtail the shadow economy.