The Impact of Financial Development on Shadow Economy in Iran: Tests for Cointegration with Structural Break

This paper employs data for the period 1974 to 2013 to examine the impact of financial development on the size of shadow economy in Iran. Zivot-Andrews unit root test were used to test for variables stationary and we used Saikkonen and Lutkepohl test for co-integration between the variables that emphasized structural break in variables. According to the cointegration test results, this paper used the dynamic OLS method developed by Stock and Watson for estimation long- run relationship between model variables. The results show that the financial development has negative and significant effect on the shadow economy in Iran and reduce the size of shadow economy. Also GDP per capita and openness have negative effect on Shadow economy and the population and inflation have positive effects on the Shadow economy in Iran.