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Does country risk moderates the financial market development and shadow economy nexus? Evidence from fast-emerging countries analysis

Sami Ur Rahman (Institute of Business Studies and Leadership, Abdul Wali Khan University Mardan, Mardan, Pakistan)
Faisal Faisal (Institute of Business Studies and Leadership, Abdul Wali Khan University Mardan, Mardan, Pakistan)
Fariha Sami (Department of Economics, Shaheed Benazir Bhutto Women University, Peshawar, Pakistan)
Friedrich Schneider (Research Institute of Banking and Finance, Johannes Kepler Universitat Linz, Linz, Austria)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 28 February 2023

172

Abstract

Purpose

The shadow economy (SE) has been a serious issue with varied dimensions in all countries that significantly affect economic growth. Therefore, all countries have made an effort to tackle the SE by pursuing several measures. This study aims to investigate the impact of financial markets (stock and bond) in reducing the SE while considering the role of country risk (political, economic and financial) in N-11 countries.

Design/methodology/approach

The study employed first-generation methodological techniques, including a unit root test to identify stationarity in the series, a panel cointegration test and panel autoregressive distributive lag (ARDL) to estimate long-run and short-run relationships. Finally, the Granger causality is applied to determine the direction of the causal relationship.

Findings

The study explored that country risk factors are crucial in reducing the size of the SE. Moreover, the significant moderating role of country risk factors in the financial market development and SE nexus suggests that by controlling the country's risk, financial market development can negatively affect the SE.

Research limitations/implications

Due to the availability of data, the study used data, ranging from 1995 to 2015, because the tax burden data is available from 1995 while the maximum data for the SE is available till 2015, using Medina and Schneider's (2019) data estimates for the SE.

Originality/value

The previous studies have focused explicitly on the role of financial institutions' development in the SE. To the best of the author's knowledge, no previous study is attempted to investigate the role of financial markets (bonds and stock) in the size of the SE. Furthermore, previous studies have ignored the important role of country risk factors in the size of the SE. This study investigates the impact of country risk on the SE and the moderating role of country risk in the development of financial markets and the SE nexus.

Keywords

Acknowledgements

The authors are thankful to the Editor-in-Chief Prof. Dr. Ilan Alon and the area Editor, Assoc. Prof. Ahmed Imran Hunjra for giving the authors a chance to revise the manuscript. The authors are also grateful to the anonymous reviewers for their valuable comments that significantly improved the quality of the manuscript. Moreover, this manuscript has been extracted from the Ph.D. thesis of the first author.

Citation

Ur Rahman, S., Faisal, F., Sami, F. and Schneider, F. (2023), "Does country risk moderates the financial market development and shadow economy nexus? Evidence from fast-emerging countries analysis", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-09-2022-1472

Publisher

:

Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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