Financial services spillover effects on informal economic activity: evidence from a panel of 20 European countries

Abstract

This study aims to investigate the spillover effects of the financial services sector development on the size of informal economic activity in the case of the European Union (EU) countries. The results from panel data analysis show that there exists an inverted U-shaped relationship between financial services and informal economic activity in the EU; that is, at the initial levels of the financial development, the reaction of informal economic activity is positive while it becomes negative at the further stages of the financial development in the EU. Thus, this study finds that financial services sector is a major contributor to changes in the volume of informal economic activity in the EU countries.