Did COVID-19 fiscal stimulus packages vary by the size of the shadow economy in countries?

What is it about?

In this paper, we use a novel cross-country dataset to investigate the relationship between the prevalence of the shadow economy and fiscal policy responses to the economic crisis induced by the pandemic.

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Photo by Martin Sanchez on Unsplash

Photo by Martin Sanchez on Unsplash

Why is it important?

The finding is that countries with a relatively larger shadow economy before the pandemic have adopted a smaller fiscal policy package. The results are robust to different econometric specifications, including an instrumental variable estimation. This reinforces the wider literature that countries (especially those with larger shadow economies) generally follow a procyclical policy as opposed to the optimal and countercyclical one.

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