Does macroprudential policy have any side effects on the shadow economy?
Abstract
Purpose
This paper aims to examine the impacts of macroprudential policy on the shadow economy worldwide.
Design/methodology/approach
We compile a panel dataset covering 125 countries from 1990 to 2018. This paper mitigates potential endogeneity issues via two-stage least squares and the two-step generalized method of moments (GMM).
Findings
The robust results show that the overall tightening of macroprudential policies exerts an expansion impact on the shadow economy. Further examination of the 16 individual macroprudential policy instruments finds that loan restrictions, countercyclical buffers, surcharges for systemically important financial institutions and capital conservation buffers have positive and statistically significant effect on the shadow economy. This relationship is only present during tightening episodes of macroprudential policy as loosening episodes do not exhibit any significant impact. Finally, this paper documents the nonlinear effects of macroprudential policy.
Practical implications
The results suggest that the supervisory authorities may need to consider another parameter, which is the development of the shadow economy, when devising the optimal macroprudential policy responses.
Originality/value
To the best of the authors’ knowledge, this paper is likely the first to empirically document the impact of macroprudential policy on the shadow economy. It contributes to the growing literature on the potential side effects of macroprudential policy on the macro-economy.
Keywords
Acknowledgements
Conflict of interests: There is no conflict of interests.
Citation
Nguyen, D.T. and Luu, N.H. (2024), "Does macroprudential policy have any side effects on the shadow economy?", Journal of Financial Economic Policy, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFEP-11-2023-0330
Publisher
:Emerald Publishing Limited
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