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The impact of shadow economy and/or corruption on private consumption: further evidence from selected Eurozone economies

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Abstract

According to neoclassical perception the growth of private consumption appears to be higher during (or after) fiscal consolidation periods via the fiscal multiplier effect. Therefore, private consumption booms are more likely to be associated with large cuts in deficits by either increasing taxes or by reducing public spending. Simultaneously, only recently shadow economy and corruption have gained scientific attention, and in the studies appear to have mainly negative effects on real economy. This research uses an alternative growth of private consumption approach using dynamic panel data regression analysis of seventeen Eurozone countries over the period 1995–2015. Empirical findings display that corruption and/or shadow economy might be substitutes regarding its effect on individuals’ real consumption growth. Furthermore, consolidation periods experience a marginal lower private growth of consumption, questioning the generality of neoclassical theory implication.

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Fig. 1

Source: European Commission (AMECO database)

Fig. 2

Sources: Shneider’s database

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Notes

  1. See for instance Hondroyiannis and Papaoikonomou’s (2015) research where authors found that during occurrences of recession, fiscal contraction based on tax hikes is remarkably more costly than expenditure cuts in terms of output growth.

  2. Informal or shadow economy also titled hidden, black or underground economy; see Hart (2008) and Scheider and Enste (2000).

  3. For more information, you can see the paper entitled “Estimating the size of the Danish shadow economy using the currency demand approach: An attempt” by Schneider (1986) or the “An expenditure-based estimate of Britain’s black economy” by Pissarides and Weber (1989).

  4. Data for shadow economy are taken from Schneider dataset.

  5. Indexes for control of corruption were retrieved from World Governance Indicators. We expect a negative correlation between corruption and private consumption as based on Dreher and Schneider (2010) shadow economy and corruption are expected to be substitute in high income economies such as Euro area countries that we analyze in our article.

  6. For a real representation of the relationship between a fiscal period (one lag period) and current growth of private consumption please see Appendix A Fig. 3.

  7. For the initial and benchmark results including only dummy variables of political accountability index please see Table 4 in Appendix A.

  8. For being sure that the obtained results in the first step of analysis–use just dummy variables of political accountability indexes- are robust to the several fundamental assumptions that were made, we performed several tests of consistency. First, we used both real values of these indicators. Second, we added alternatively these indicators and also put them all together in the same regression models as we can see in the Table 3. Lastly, we used alternative instrument variables using IV methodology. All these approaches did not change both the results of the coefficients and its significance.

  9. We also used the lagged of fiscal consolidation variable because the real impact of a change in fiscal policy has also a short-time impact or real consumers’ behavior (private consumption).

  10. Here we mean the simple fiscal consolidation: Δdeficit=deficitt-deficitt-1. That means that we have not used the Giaviazzi and Pagano’s definition for these columns.

  11. The average coefficient of the interaction term is 0.121.

  12. Giavazzi and Pagano’s (1996) definition.

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Acknowledgements

The author is immensely grateful to Sarantis Lolos and George Hondroyiannis for providing useful insights into the shadow economy issues that greatly improved the manuscript. I wish also to thank Frank Stevens and Dimitra Papadaki. The author is thankful to the anonumous referees for the valuable suggestion towards the improvement of this manuscript.

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  1. School of Environment, Geography and Applied Economics, Department of Home Economics and Ecology, Harokopio University, 70 El. Venizelou Av., 17671, Athens, Greece

    Ioannis Kostakis

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Correspondence to Ioannis Kostakis.

Appendix

Appendix

See Fig. 3 and Table 4.

Fig. 3
figure 3

Growth of private consumption after fiscal consolidation or normal period

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Table 4 The private consumption growth during fiscal contractions using dummy variables for political accountability indexes
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Kostakis, I. The impact of shadow economy and/or corruption on private consumption: further evidence from selected Eurozone economies. Eurasian Econ Rev 7, 411–434 (2017). https://doi.org/10.1007/s40822-017-0072-2

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