Quo Vadis Shadow Economy in A Digitalized World? Evidence from Panel Cointegration for EU Countries

Abstract

Digitalization is defining reality of our times, significantly affecting all aspects of our lives. Over recent decades, substantial progress has been made in the fields of digital finance and digital transformation. This study delves into the impact of digitalization on the shadow economy across the 27 European Union countries from 2008 to 2022. The main findings of the empirical analysis, which employs panel corrected standard errors (PCSEs) and fully modified ordinary least square (FMOLS) demonstrate a significant contribution of e-government and internet banking in reducing the shadow economy. Additionally, a noteworthy result confirms the significant and positive impact of internet access by companies on the shadow economy flourishing within the New Member States (NMS 13). Political strategies targeting the reduction of the underground economy must take into account the future intensification of digitalization in the public sector, encompassing everything from communication with the citizens to the provision of public services.