Financial inclusion, the shadow economy and economic growth in developing economies

Abstract

This study explores the impact of the financial inclusion and size of the shadow economy on the economic growth of developing economies over the period 2008–2017. The data for the endogenous, exogenous and control variables were collected from the World Development Indicators, the International Monetary Fund's (IMF) Financial Access Survey (FAS) and Medina and Schneider's global database (2019). The study applies a panel ordinary least square (OLS) fixed effect, a two-step difference generalised method of moments (GMM) and panel Granger causality approach. The results reveal that financial inclusion has a positive and statistically significant impact on economic growth; while in developing economies, the size of the shadow economy has a significant negative impact on economic growth. The findings remain robust to alternative econometric estimations. The asymmetric results in different countries provide practical insights for governments, policymakers and regulators.