Shadow economy and its impact on economic growth

Abstract

This research aims to investigate the correlation between economic growth and the shadow economy in Albania between 1996 and 2019 and their connection to government tax revenue. Accurately measuring the informal economy can aid governments in developing more effective policies that are better targeted. To accurately measure the shadow economy, the autoregressive distributed lag (ARDL) bound test was conducted after verifying the data series’ stationarity. The findings of the Granger causality test revealed a one-way relationship where the shadow economy impacted economic growth in Albania. However, there was no significant correlation between the two variables. However, there was a crucial and adverse association in the long run between the shadow economy and tax revenue (% GDP). The augmented Dickey-Fuller test (ADF) test produced a significant outcome, demonstrating that the shadow economy has a detrimental influence on tax revenue. In conclusion, the study emphasizes the Albanian government’s need to combat the informal sector by enhancing tax collection.