The Shadow Economy in Iran: An Analysis of Uncertainty and the Moderating Role of Financial Development

Articles in Press

Document Type : پژوهشی

Authors

Mahdi Rahimi bakhshmand ¹

sima eskandari sabzi, ²

mehdi moradi ³

Seyed yousef hajiasghar hajiasghari ⁴

¹ Department of Economics ,Mi.c,Islamic Azad University,Miyaneh,Iran

² Department of Economics,Mi.c,Islamic Azad University,Miyaneh,Iran

³ Department of Economics,Payam Noor University,Tehran,Iran

⁴ Department of Management , Mi.c,Islamic Azad University,Miyaneh,Iran

https://doi.org/10.22067/mfe.2025.93982.1565

Abstract

The shadow economy, defined as a set of economic activities that remain hidden from formal institutions, represents a fundamental and complex phenomenon in Iran's economy. The objective of this study is to assess the impact of economic policy uncertainty on the size of the shadow economy, with a specific focus on the moderating role of financial development. Utilizing data from 1978 to 2022 and employing the Autoregressive Distributed Lag (ARDL) model, this research was conducted. The obtained results indicate that economic policy uncertainty has a positive and significant effect on the shadow economy in the short run, but no direct impact is observed in the long run. However, financial development positively moderates this relationship, meaning it amplifies the effects of uncertainty. Furthermore, the positive relationship between GDP and the shadow economy and the inverse effect of interest rate uncertainty on it are unconventional phenomena that can be explained by the unique structure of Iran's economy. These findings emphasize the necessity for precise and targeted policymaking, taking into account the unique institutional and structural characteristics of the Iranian economy.

Keywords

Shadow economy

Economic uncertainty

Financial development

Iran

Subjects

• Development Economics

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