A Global Analysis of Financial Crises and the Growth of Informal Economic Activity

Objective Though a large body of work has focused on how financial crises impact the formal economy, scant research has explored how financial crises affect informal economic activity. Methods We analyze data on informal economies and multiple types of financial crises for 143 countries for the years spanning 1970 to 2011. Results Banking and debt crises have both immediate and lingering positive effects on the shadow economic growth. Currency crises are also positively associated with shadow economy growth, but the effect is likely to be short‐lived with no major lingering impact following the initial year of the crisis. Conclusion We uncover a complex dynamic between financial crises and the growth of the informal economy, with an implication being that crises may result in a sustained movement of labor and capital out of the formal economy.