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Military expenditures and shadow economy in the Baltic States: Is there a link?

Igor Fedotenkov and Friedrich Schneider ()

MPRA Paper from University Library of Munich, Germany

Abstract: The main goal of our paper is to determine the existence of a link between government (military) expenditures and the shadow economy in the Baltic States. The empirical investigation is done over the years 2003-2014 for Estonia, Latvia and Lithuania. We showed that there is a highly statistically significant positive dependence between the size of the shadow economy and military expenditures in the Baltic States. Our conclusion is that higher military expenditures indeed lead to a higher shadow economy and this result is robust to different model specifications. In order to demonstrate the importance of our highly statistically significant results we undertook a simulation where we calculated how much the size of the shadow economy would increase if the size of military expenditure as a percentage of GDP doubled: In Estonia such an expansion would have led to an increase in the size of the shadow economy from 27.1% to 30.1%, in Latvia from 24.7% to 26.1% and in Lithuania from 27.1% to 28.4% in 2014.

Keywords: Shadow economy; military expenditures; Baltic States (search for similar items in EconPapers)
JEL-codes: E26 E62 H26 H50 H56 O17 (search for similar items in EconPapers)
Date: 2017-01-02
New Economics Papers: this item is included in nep-cis, nep-iue, nep-mac and nep-tra
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