A Panel VAR Analysis of the Shadow Economy in Europe and MENA

The objective of this chapter is to analyze empirically the potential dynamics of the relationship among the size of the shadow economy, fiscal burden and the official economy. The empirical analysis is based on the size estimates of the shadow economy in 17 developed and 11 transition economies of Europe for the period 1999-2013 and in 16 economies of Middle East and North Africa for the period 1999-2007. Direction of causal relations among shadow and official economies and the fiscal burden is investigated by exploiting the panel vector auto-regression approach and the associated impulse response analysis, which directly account for the potential endogeneity of the variables of interest. Findings mostly confirm the view that shadow and official economies are substitutes, and the dynamic effects of fiscal burden on the shadow economy are not as strong and clear as expected in the regions in question.