Euro Switch and Shadow Economies

Abstract

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.