Interactions between Financial Sector Development and Underground Economic Activity: Empirical Evidence from European Countries

This thesis investigates the effects of financial sector development on the size of the underground economy in the selected twenty European Union (EU) countries. In the first stage, the size of the underground economy has been estimated by using the MIMIC (multiple indicators and multiple causes) model approach. In the second stage, panel data analysis has been conducted using the period from 1994 to 2014 in order to examine the effect of the financial sector development on the size of the underground economy. Trade openness and interest rates have been selected as control variables. Results suggest that the financial sector development and trade openness have significant roles in the level of the underground economic activities. The main findings of this thesis suggest that the financial development along with trade openness has reducing effects on the size of the underground economy as parallel to the theory while interest rate increases the size.