Income Inequality and Shadow Economy in the EU. A Panel Cointegration and Causality Analysis

Simona-Gabriela Masca (), Madalina Drutu and Andrada-Maria Pojoca
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Simona-Gabriela Masca: Babeş-Bolyai University
Madalina Drutu: Babeş-Bolyai University
Andrada-Maria Pojoca: Babeş-Bolyai University

Chapter Chapter 35 in Advances in Quantitative Economic Research, 2022, pp 513-529 from Springer

Abstract: Abstract Current political and economic discourse in Europe is often animated by public concerns about the income gap between the rich and the poor on one hand, and the informal economy on the other hand. As researchers argue, the two phenomena do not produce independently; there is some connection between them. This study explores the interrelation between shadow economy and income inequality in the 28 European Union countries over the 2007–2017 period, by means of panel cointegration and causality tests. The hypothesis under test is that the two variables experience a long-term relationship and one of them is a predictor factor for the other. The results lead to the conclusion that there is a long-run relationship between income inequality and shadow economy in our panel. The VECM is estimated, concluding that income inequality does cause shadow economy in EU-28 countries, but shadow economy does not cause income inequality. Our findings are valid under robustness tests, guiding to important policy implications.

Keywords: Income inequality; Shadow economy; Panel cointegration; Causality; JEL classification: H26; O15 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-98179-2_35

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DOI: 10.1007/978-3-030-98179-2_35

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