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Determinants of the Shadow Economy in Türkiye: The Role of Innovation, Government Quality, Government Size, and Inflation

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  • Mehmet Ela

Abstract

Global economies are negatively impacted by the shadow economy, and hence, many governments have been increasingly trying to combat it in recent years. Considering the crucial importance of limiting the size of the shadow economy and the factors influencing it, the primary goal of this study is to investigate how innovation, government size, government quality, and inflation affect the shadow economy in Türkiye. To achieve the study’s objectives, we employ Fourier Shin cointegration and Fourier-based DOLS tests, covering the period from 1990 to 2020. The findings of the study indicate that the effects of innovation, government size, and government quality on the shadow economy are negative and statistically significant. However, inflation affects the shadow economy positively and significantly. Therefore, policymakers should allocate greater resources within the government size to combat the shadow economy in Türkiye, while simultaneously increasing policies that promote innovation, improving government quality, and maintaining macroeconomic stability by controlling inflation more effectively.

Suggested Citation

  • Mehmet Ela, 2026. "Determinants of the Shadow Economy in Türkiye: The Role of Innovation, Government Quality, Government Size, and Inflation," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 11(1), pages 77-105.
    • Handle: RePEc:ahs:journl:v:11:y:2026:i:1:p:77-105
    DOI: 10.30784/epfad.1806987

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    References listed on IDEAS

    1. Park, Joon Y, 1992. "Canonical Cointegrating Regressions," Econometrica, Econometric Society, vol. 60(1), pages 119-143, January.
    2. Furkan Emirmahmutoglu & Tolga Omay & Syed Jawad Hussain Shahzad & Safwan Mohd Nor, 2021. "Smooth Break Detection and De-Trending in Unit Root Testing," Mathematics, MDPI, vol. 9(4), pages 1-25, February.
    3. Mohammed Nayel Abu Alfoul & Ibrahim Naser Khatatbeh & Fouad Jamaani, 2022. "What Determines the Shadow Economy? An Extreme Bounds Analysis," Sustainability, MDPI, vol. 14(10), pages 1-22, May.
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    Keywords

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    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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