Analysis of the impact of financial deepening on the shadow economy in Iran during 4 decades: emphasizing financial markets and financial institutions

As one of the main economic sectors, the financial market is closely linked with the shadow economy. In this research, first, the size of the shadow economy in Iran was calculated using the the Multiple Indicators - Multiple Causes (MIMIC) method in the period from 1980 to 2020, which has an average of 16.81% in the research period. Then, the effect of the deepening of financial markets and financial institutions separately on the size of the shadow economy was investigated and tested with the the autoregressive distributed lag approach. The findings from the long-run estimation of the model indicate that the deepening of financial markets has a negative effect on the shadow economy, while the deepening of financial institutions has a positive effect on the size of the shadow economy. In relation to the positive impact of the deepening of financial institutions on the size of the shadow economy in Iran, it can be acknowledged that Iran is a developing country and cannot allocate more resources to the development of its financial institutions, and financial institutions do not have the proper efficiency, so financial institutions have not been able to To serve the real sector of economy and investment. Also, the deepening of financial institutions due to the lack of trust and transparency and the structural defects of banks at the moment, cannot lead to the growth of the formal sector and eventually reduce the size of the shadow economy, but will increase its size. Other findings are that the direct tax burden has a positive and significant effect on the size of the shadow economy, degree of trade openness does not have a significant effect on the size of the shadow economy in Iran. It should also be noted that there is a significant difference in the size of the positive effect of the direct tax burden on the size of the shadow economy compared to other model variables. Therefore, direct tax rates should be optimized to control the size of the shadow economy in line with the optimal allocation of resources and redistribution of income in the country.