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Catching the mirage: The shadow impact of financial crises

Hany Abdel-Latif, Bazoumana Ouattara, Phil Murphy, Hany Mohamed

The Quarterly Review of Economics and Finance

Swansea University Author: Hany Mohamed

Abstract

This paper examines the dynamics of the shadow economy in times of financial crises. First, we estimate the size of the shadow economy in nine developing countries using energy consumption as a proxy for total economic activity. We show that our proposed proxy performs better than the conventional p...

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Published in: The Quarterly Review of Economics and Finance
ISSN: 10629769
Published: 2017
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa33011
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Abstract: This paper examines the dynamics of the shadow economy in times of financial crises. First, we estimate the size of the shadow economy in nine developing countries using energy consumption as a proxy for total economic activity. We show that our proposed proxy performs better than the conventional proxy of electricity consumption. In addition, given that financial crises usually overlap; a fact that is overlooked by existing literature, we construct a zero-one index to measure the intensity of a given shock. To explain the shadow economy impact of financial crises, we employ a set of country-specific VAR models and exploit their impulse responses. To this end, the paper finds empirical evidence of the countercyclical behaviour of the shadow economy, which suggests its buffering role in time financial crises. We show that our results are not sensitive to the method used to measure the size of the shadow economy. Finally, we build on these results to draw some policy recommendations.
Keywords: Financial crisis; Shadow economy; Developing countries
College: Faculty of Humanities and Social Sciences