Adriana AnaMaria DAVIDESCU(ALEXANDRU), Vasile Alecsandru STRAT


Shadow economy (SE) represents a controversial phenomenon, present more or less in all economies, whose empirical estimates should be regarded with due reserve.

The main goal of this paper is to analyze the nature of the relationship between Romanian shadow economy, expressed as % of the official GDP and the foreign direct investments (FDI) using two causality analysis methods, namely the Granger causality analysis method and the Toda-Yamamoto procedure, based on quarterly data, over the period 2000-2010. The paper will also try to particularize the implications of this relationship on the sustainable development of the Romanian economy.

For that purpose we will use the shadow economy series estimated in a previous article using one of the monetary approaches, the currency demand approach, based on econometrical methodology of error correction models and co-integration. The quantitative demarche of shadow economy estimation is detailed in Alexandru (Davidescu) and Dobre (2013).

The empirical results highlight a unidirectional short-run causality that runs only from foreign direct investments to the shadow economy. The impulse responses function indicates a short-run negative relationship between FDI and SE.


Granger causality; Toda-Yamamoto approach; shadow economy; foreign direct investments


Abed, G.T. and Davoodi, H. R.(2002). Corruption, Structural Reforms, and Economic Performance, Governance, Corruption & Economic Performance, ed. by G.T. Abed und S. Gupta, International Monetary Fund, Washington D.C, 2002,: pp.489-537.

Al-Sadig, A.(2007). The effects of corruption on FDI inflows. The Cato Journal, 2009, 29, 267.

Albu, L.L., A Model To Estimate Spatial Distribution Of Informal Economy, Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(4), 2007, 111-124.

Albu, L.L., Iorgulescu, R., and Stanica, C(2010). Estimating Hidden Economy and Hidden Migration: The Case of Romania, Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), 2010, 46-56.

Albu, L.L., Ghizdeanu, I., and Stanica, C.(2011). Spatial Distribution of the Informal Economy. A Theoretical and Empirical Investigation, SCIENZE REGIONALI, FrancoAngeli Editore, vol. 0(1), 2011, 63-80.

Alexandru(Davidescu) A. and Dobre, I.(2013).The impact of unemployment rate on the size of Romanian Shadow Economy”, Public Finance Review, Special Issue: The Shadow Economy, Tax Evasion, and Money Laundering, September 2013, 41: 608-632, first published on June 16, 2013 doi:10.1177/1091142113487006.

Alexandru(Davidescu) A. and Dobre, I.(2012).The causal relationship between Unemployment rate and U.S. Shadow economy. A Toda-Yamamoto approach, Journal of Social and Economic Statistics, no.1/2012, pg.21-34, ISSN 2285-388X.

Asiedu, E.(2006). Foreign Direct Investment in Africa: The Role of Natural Resources, Market Size, Government Policy, Institutions and Political Instability. World Economy, 2006, 29, 63-77.

Cleeve, E.(2008). How Effective Are Fiscal Incentives to Attract FDI to Sub-Saharan Africa?, The Journal of Developing Areas, 2008, 42, 135-153.

Davidescu A. and Dobre, I.(2013). The relationship between shadow economy and unemployment rate. A ARDL causality analysis for the case of Romania, International Conference New Techniques and New Technologies for Statistics, March 5-7, 2013, Eurostat, Brussels, Belgium.

Davies R. B.(2005). State tax competition for foreign direct investment: A winnable war?, Journal of International Economics, 2005, 67, 498– 512.

Dell’Anno, R.(2003). Estimating the shadow economy in Italy: A structural equation approach, Discussion Paper, Department of Economics and Statistics, University of Salerno, 2003.

Dell’Anno R., and Solomon, O.(2006). Shadow Economy And Unemployment Rate In U.S.A. Is There A Structural Relationship? An Empirical Analysis., (For the Annual Meeting of the European Public Choice Society, Finland, April 20-23, 2006)

Dreher, A. and Schneider, F.(2006).Corruption and the Shadow Economy: An Empirical Analysis, CREMA Working Paper, 2006, Basel, Center for Research in Economics, Management and the Arts.

Duasa, J.(2007). Malayasian foreign direct investment and growth: does stability matter?, Journal of Economic Cooperation, 28, 2/2007, pg.83-98.

Egger, P. and Winner, H.(2005).Evidence on corruption as an incentive for foreign direct investment, European Journal of Political Economy, 2005, 21/4, pp. 932-952.

Esso, J.L.(2010). Long-Run Relationship and Causality between Foreign Direct Investment and Growth: Evidence from Ten African Countries, International Journal of Economics and Finance, Vol. 2, No. 2/2010, pg.168-177.

Friedman, E., Johnson, S., Kaufmann, D., and Zoido-Lobaton, P.(2000).Dodging the Grabbing Hand: The Determinants of Unofficial Activities in 69 Countries, Journal of Public Economics, 2000, 76: 459-493.

Giles, David, E.A. and Lindsay M. Tedds(2002). Taxes and the Canadian Underground Economy, Canadian Tax Paper No. 106, 2002, Canadian Tax Foundation, Toronto/Ontario.

Habib, M. and Zurawicki, L.(2002).Corruption and Foreign Direct Investment, Journal of International Business Studies, 2002, Vol. 33 (2).

Lackó, M.(1999). Hidden economy an unknown quantity? Comparative analyses of hidden economies in transition countries in 1989-95, Working paper 9905, 1999, Department of Economics, University of Linz, Austria.

Lippert, O., and Walker, M(1997).The Underground Economy: Global Evidences of its Size and Impact, Vancouver, B.C.: The Frazer Institute, 1997.

Morrissey, O. & Udomkerdmongkol, M., Governance(2012). Private Investment and Foreign Direct Investment in Developing Countries. World Development, 2012, 40, 437-445.

Mummert, A., and Schneider, F.(2001).The German shadow economy: Parted in a united Germany?, Finanzarchiv, 2001, 58/3, pp.260-285.

Murtha, T. and Lenway, S.(1994). Country Capabilities and the Strategic State: How National Political Institutions Affect Multinational Corporations’ Strategies, Strategic Management Journal, 1994, 15(summer): 113-129.

Nikopour, H., Habibullah, M.S., Schneider, F., and Hook Law, S.(2009).Foreign Direct Investment and Shadow Economy: A Causality Analysis Using Panel Data, MPRA Paper No. 14485, 2009,

Pesaran, H.M. and Shin, Y. (1998).Generalized Impulse Response Analysis in Linear Multivariate Models, Economic Letters 58, 1998, pp.7-29.

Rambaldi, A., and Doran, H.(1996). Testing for Granger Non-Causality in Cointegrated Systems Made Easy, Working Papers in Econometrics and Applied Statistics No.88, 1996, The Department of Econometrics, University of New England.

Schneider, F.(1994). Measuring the size and development of the shadow economy. Can the causes be found and the obstacles be overcome? in: Brandstaetter, Hermann, and Güth, Werner (eds.): Essays on Economic Psychology, Berlin, Heidelberg, Springer Publishing Company, 1994, pp. 193-212.

Schneider, F.(1997). The shadow economies of Western Europe, Journal of the Institute of Economic Affairs, 1997, 17/3, pp. 42-48.

Schneider, F.(1998).Further empirical results of the size of the shadow economy of 17 OECD-countries over time, Paper to be presented at the 54. Congress of the IIPF Cordowa, Argentina and discussion paper, 1998, Department of Economics, University of Linz, Linz, Austria.

Schneider, F.(2000). The increase of the size of the shadow economy of 18 OECD Countries: Some preliminary explanations, Paper presented at the Annual Public Choice Meeting, March 10-12, 2000, Charleston, S.C.

Schneider, F.(2003). The shadow economy, in: Charles K. Rowley and Friedrich Schneider (eds.), Encyclopedia of Public Choice, 2003, Kluwer Academic Publishers, Dordrecht.

Schneider, F.(2005). Shadow Economies around the World: What do we really know?, European Journal of Political Economy, 2005, 21/3, pp. 598-642.

Schneider, F(2007)., Shadow Economies and Corruption all over the World: New Estimates for 145 Countries, The Open Access - Open Assessment, E-Journal No. 09, 2007.

Schneider, F., Buehn, A.(2007). Shadow economies and corruption all over the world: revised estimates for 120 countries, Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(9 (Versio), 2007, 1-53.

Thomas, J. J.(1992).Informal Economic Activity, LSE, Handbooks in Economics, London: Harvester Wheatsheaf., 1992

Toda, H.Y., Yamamoto, H.(1995).Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, Vol. 66/1995, 1995, pp. 225-250.

Torgler, B., and Schneider, F.(2007). Shadow Economy, Tax Morale, Governance and Institutional Quality: A Panel Analysis, CREMA Working Paper, 2007, Centre for Research in Economics, Management and the Arts, Basel, Switzerland.

Wei, S.-J.(2000).How Taxing is Corruption on International Investors?, Review of Economics and Statistics, 2000, 82, 1-11.


*** Internal Financial Statistics (IFS) Database, International Monetary Fund

*** Eviews 7.0

Full Text: PDF

Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.