Economic Dynamics of Informal Output in Romania: An ARDL Approach to Policy, Growth, and Institutional Sustainability

Abstract

In this paper we investigate the short-run and long-run determinants of the informal economy in Romania using Dynamic General Equilibrium (DGE)-based estimates of informal output as the dependent variable. An ARDL model is used to analyze macroeconomic and institutional variables for Romania during the period of 1995–2023, including inflation (INF), primary net lending/borrowing (NLB), the political stability index (PSI), interest payments (INTPAY), gross domestic product per capita (GDP), and self-employment (SEMP). The findings show that inflation, fiscal balance, political stability, interest payments, and GDP per capita have a short- and long-run impact on informal output. In the long run, a 1% increase in inflation raises informal output by 0.03%, while a 1% rise in GDP per capita reduces it by 0.29%. The error correction term suggests a rapid adjustment speed of 79% toward the long-run equilibrium. These findings suggest that institutional reforms, sustained economic growth, and stable macroeconomic policies play an important role in reducing informality and promoting sustainable economic resilience in Romania.