The hard shadow of the Greek economy: new estimates of the size of the underground economy and its fiscal impact

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Abstract:

This article presents new estimates of the Greek underground economy and explores the link between the underground economy and aggregate debt. We show that the Greek underground economy has been underestimated heavily and has been on a rising trend again since Greece adopted the Euro. We also present evidence that the size of the underground economy is positively related to the debt-to-GDP ratio, implying that fighting the underground economy is also conducive to financial and macroeconomic stability. Our results suggest that for our sample of 11 EMU member countries, the loss of the inflation tax as an economic policy instrument had drastic consequences. While the underground economy did not have a statistically significant impact on aggregate debt before the introduction of the Euro, it has pushed up the debt-to-GDP ratio in our sample since.

Keywords: E41; E63; H26; H63; MCDR approach; O17; debt crisis; debt-to-GDP ratio; inflation tax; underground economy

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036846.2014.896984

Affiliations: 1: Institute of Business and Economics, Brandenburg University of Technology Cottbus, 03013, Cottbus, Germany 2: Institute of Economics and Information Sciences, University of Hildesheim, Hildesheim, Germany 3: Institute of Public Economics II, University of Münster, 48143, Münster, Germany 4: Department d’Economia i CREIP, Universitat Rovira i Virgili, 43204, Reus, Spain

Publication date: June 23, 2014

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