A1910
Title: Economic policy uncertainty, financial development, and shadow economy: Evidence from cross-country data
Authors: Chen-Sheng Lin - Tamkang University (Taiwan) [presenting]
Abstract: Since 2020, surging economic policy uncertainty (EPU) has disrupted global economic systems and financial intermediation. While recent studies link EPU to shadow economy (SE) expansion, they largely overlook financial development (FD) and EPU's moderating role, risking omitted variable bias. Using a 28-country panel (2000-2024) and a panel quantile autoregressive distributed lag (PQARDL) model, the long-run nexus among EPU, FD, and the SE is investigated, controlling for other variables. Applying the pooled mean group estimator across conditional SE quantiles unveils significant heterogeneous effects. First, robust long-run convergence exists across all quantiles. Second, at middle and high quantiles, both EPU and FD inherently restrain the SE. However, their interaction reveals a critical moderating effect: amid heightened uncertainty, risk shifting and informal financing severely undermine FD's ability to reduce the SE. Conversely, at lower quantiles, FD successfully fortifies formal financial channels, further suppressing SE size. Regarding policy implications, for countries with a substantial SE, merely promoting financial deepening is insufficient. Policymakers must concurrently strive to maintain a stable, low-uncertainty macroeconomic environment. Only through the synergistic combination of both can a mature financial system effectively optimize resource allocation, thereby fulfilling the long-term development goal of curtailing the SE.
