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

Global economies are negatively impacted by the shadow economy and hence, many governments have been trying to combat it. 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 the Bayer-Hanck cointegration and fully modified least squares (FMOLS) tests, along with a canonical cointegrating regression (CCR) test for robustness, covering the period from 1990 to 2020. The findings indicate that the effects of innovation, government size, and government quality on the shadow economy are negative and significant. However, inflation affects the shadow economy positively and significantly. Therefore, policymakers need to allocate more resources within government size to combat the shadow economy in Türkiye, while simultaneously enhancing innovation and government quality, and controlling high inflation.