Nonlinearity between financial development and the shadow economy: Evidence from Jordan

Abstract

The present study empirically investigates the long-run nonlinear relationship between the shadow economy and financial development targeting developing small open countries, such as Jordan. The study applied the cointegration test as an estimation technique in order to achieve its aim. The data used were mainly taken from Jordanian economy during the period (1990-2019). According to the test of Johanson cointegration, the empirical results of this study showed evidence of a long run inverted U-shaped relationship between the shadow economy and financial development. The results also showed that there is a long run positive relationship between inflation and the shadow economy. Consequently, these results lead to a profound implication when adopting policies to reduce the size of the shadow economy.