Hide and Seek: IMF Intervention and the Shadow Economy: An Empirical Investigation

Abstract

This study investigates the effect of IMF intervention on the size of the shadow economy. Using a panel of 141 countries from 1991 to 2014 we examine the impact of both IMF participation and conditionality on the informal economy. Following a recent methodological approach our analyses address sources of endogeneity related to, first the IMF participation decision and, second, the conditions included within the program. The empirical findings suggest that both IMF program participation and conditionality increase the size of the shadow economy. When we differentiate IMF conditions into structural and quantitative, we show that only structural conditions are significantly related to a larger shadow economy. Financial development can reduce the size of the shadow economy; however, it cannot reverse the detrimental effect from IMF intervention. Our initial results are found to be robust across alternative empirical specifications