The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper is the first attempt to directly explore the long-run nonlinear relationship between the
shadow economy and level of development. Using a dataset of 158 countries over the period from
1996 to 2015, our results reveal a robust U-shaped relationship between the shadow economy size
and GDP per capita. Our results imply that the shadow economy tends to increase when economic
development surpasses a given threshold or at least does not disappear. Our findings suggest that
special attention should be given to the country's level of development when designing policies to
tackle issues related to the shadow economy.