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Does the underground economy hold back financial deepening? Evidence from the Italian credit market

Author

Listed:
  • Giorgio Gobbi

    (Bank of Italy, Department of Structural Studies on the Italian Economy.)

  • Roberta Zizza

    (Bank of Italy, Department of Structural Studies on the Italian Economy.)

Abstract
The paper investigates the relationship between the underground economy and financial deepening. Entrepreneurs can only access external finance by disclosing credible information in formal documentation. This may be impossible for many informal producers, who lack proper accounting records. Similarly, irregular workers may have difficulty borrowing to finance consumption and house purchases. Using panel data on local credit markets in Italy, we find that the share of irregular employment has a strong negative impact on outstanding credit to the private sector. According to our estimates, a shift of 1 per cent of employees from regular to irregular work corresponds to a decline of 1-2 percentage points of GDP in the volume of business lending and of 0.3 percentage points in outstanding credit to households. By contrast, the feedback effects of financial deepening on the size of the informal sector are weak and statistically not significant. Applying a difference-in-difference approach that exploits the exogenous variation induced by the regularization programme for immigrant workers launched in 2002, we also find that irregular labour has a negative effect on banks� decisions to enter local credit markets.

Suggested Citation

  • Giorgio Gobbi & Roberta Zizza, 2007. "Does the underground economy hold back financial deepening? Evidence from the Italian credit market," Temi di discussione (Economic working papers) 646, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_646_07
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    References listed on IDEAS

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    Cited by:

    1. Merita Boka & Giuseppe Torluccio, 2013. "Informal Economy in Albania," Academic Journal of Interdisciplinary Studies, Richtmann Publishing Ltd, vol. 2, October.
    2. Edoardo Di Porto & Leandro Elia, 2015. "Estimating Labor Demand Function in the Presence of Undeclared Labour: A Look Behind the Curtain," CSEF Working Papers 389, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    3. Henri Njangang & Luc Ndeffo Nembot & Joseph Pasky Ngameni, 2020. "Does financial development reduce the size of the informal economy in sub‐Saharan African countries?," African Development Review, African Development Bank, vol. 32(3), pages 375-391, September.
    4. Simone Auer & Emidio Cocozza & Andrea COlabella, 2016. "The financial systems in Russia and Turkey: recent developments and challenges," Questioni di Economia e Finanza (Occasional Papers) 358, Bank of Italy, Economic Research and International Relations Area.
    5. Aïssata Coulibaly & Urbain Thierry Yogo, 2016. "Access to Financial Services and Working Poverty in Developing Countries," Working Papers halshs-01403001, HAL.
    6. Bruno Chiarini & Maria Ferrara & Elisabetta Marzano, 2020. "Tax Evasion, Investment Shocks, and the Consumption Puzzle: A DSGE Analysis with Financial Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 907-932, June.
    7. Rita Cappariello & Roberta Zizza, 2010. "Dropping the Books and Working Off the Books," LABOUR, CEIS, vol. 24(2), pages 139-162, June.
    8. Bruno Chiarini & Maria Ferrara & Elisabetta Marzano, 2016. "Investment Shocks, Tax Evasion and the Consumption Puzzle: A DSGE Analysis with Financial Frictions," CESifo Working Paper Series 6015, CESifo.
    9. Berdiev, Aziz N. & Saunoris, James W., 2016. "Financial development and the shadow economy: A panel VAR analysis," Economic Modelling, Elsevier, vol. 57(C), pages 197-207.
    10. Salvatore Capasso & Stefano Monferrà & Gabriele Sampagnaro, 2015. "The Shadow Economy and Banks’ Lending Technology," CSEF Working Papers 422, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    11. Siddiki, Jalal, 2013. "The size and development of the shadow economy in Bangladesh: An empirical investigation," Economics Discussion Papers 2013-3, School of Economics, Kingston University London.
    12. Marã­A Paula Vargas & Erick Lahura, 2022. "Financial Development, Financial Inclusion And Informality: New International Evidence," Global Economy Journal (GEJ), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-42, September.
    13. Téllez-León, Isela Elizabeth & Venegas-Martínez, Francisco, 2019. "Determinants of Financial Deepening in Mexico: A Dynamic Panel Data Approach || Determinantes de la Profundad Financiera en México: Un Enfoque de Datos De Panel Dinámico," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 27(1), pages 285-299, June.
    14. Yilmaz Bayar & Omer Faruk Ozturk, 2016. "Financial Development and Shadow Economy in European Union Transition Economies," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 14(2 (Summer), pages 157-173.
    15. Folorunsho M. Ajide, 2021. "Shadow economy in Africa: how relevant is financial inclusion?," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 29(3), pages 297-316, April.
    16. Misbah Kiani & Adeel Ahmed & Khalid Zaman, 2015. "Combining qualitative and quantitative approaches for measuring underground economy of Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(1), pages 295-317, January.

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    More about this item

    Keywords

    irregular employment; bank lending; school drop-out; entry; branching; regularisation program;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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