Abstract
The present study empirically investigates the long-run nonlinear relationship between the shadow economy and financial development targeting developing small open countries, such as Jordan. The study applied the cointegration test as an estimation technique in order to achieve its aim. The data used were mainly taken from Jordanian economy during the period (1990-2019). According to the test of Johanson cointegration, the empirical results of this study showed evidence of a long run inverted U-shaped relationship between the shadow economy and financial development. The results also showed that there is a long run positive relationship between inflation and the shadow economy. Consequently, these results lead to a profound implication when adopting policies to reduce the size of the shadow economy.
Highlights
The shadow economy, known as the hidden or informal economy, describes the unauthorized economic activities of the official agents
Since the financial sector develops ways of financing to become easier and cheaper, the opportunity cost to participate in the shadow economy becomes greater
This paper attempts to provide an empirical investigation of the long-run nonlinear relationship between the shadow economy and financial development targeting developing small open economies, such as the economy of Jordan
Summary
The shadow economy, known as the hidden or informal economy, describes the unauthorized economic activities of the official agents. The attempts of individuals or firms to moderate the impact of low income in the formal economy during the recession periods, through the activities of the informal economy All these factors contribute to increasing the size of this phenomenon (Schneider et al, 2010). The needs to meet legal labor market standards; such as minimum wages, the maximum number of working hours, public safety standards, etc., which may urge firms to be involved in the activities of the informal economy. Illegal activities such as theft, drug trade and household activities increase the size of the shadow economy (Schneider & Williams, 2013)
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
