Analyzing the Role of Remittances and Financial Development in the Size of the Shadow Economy: Insight from Africa

This research assesses the impact of remittances and financial development on the size of shadow economy in Africa. Furthermore, the study examines the moderating effect of financial development on the linkages between remittances and the shadow economy. The data set for the study comprises 29 African countries between 2000 and 2020, while Driscoll and Kraay’s non-parametric standard error, fully modified ordinary least squares, augmented mean group, and method of moment quantile regression are used as estimation techniques. The study documents that remittances and financial development lessen the size of shadow economy in Africa. Additionally, the study found no substitute or complementary role of financial development and remittances in influencing the size of the shadow economy. This suggests that financial development and remittances can have separate effects on the size of the shadow economy. The results of other control variables also indicate that economic growth and foreign direct investment reduce the size of the shadow economy while population and institutional quality increase its size. The results of this study are robust to different estimation techniques.