Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles

Ayhan Kose, Ceyhun Elgin, Franziska Ohnsorge and Shu Yu

No 16498, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the degree of synchronization between formal- and informal-economy business cycles. Using a comprehensive database of informal activity that covers a wide range of informality measures from almost 160 countries over the 1990-2018 period, we report two major results. First, fluctuations in informal-sector output are strongly positively correlated with those in formal-sector output. In contrast, fluctuations in informal employment are largely uncorrelated with those in formal-sector output. Second, movements in the formal economy tend to spillover to the informal economy. Using a novel set of instrumental variables, we show that fluctuations in formal-sector output “cause†movements in informal-sector output.

Keywords: Informal economy; Self-employment; Business cycle (search for similar items in EconPapers)
JEL-codes: E26 E32 J46 O17 (search for similar items in EconPapers)
Date: 2021-08
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Citations: View citations in EconPapers (3)

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Working Paper: Growing apart or moving together? Synchronization of informal and formal economy cycles (2021)
Working Paper: Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles (2021)
Working Paper: Growing Apart or Moving Together? Synchronization of Informal and Formal Economy Cycles (2021)
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