Abstract
Purpose
This study investigates the relationship between the shadow economy and environmental degradation, measured through the ecological footprint, in G7 countries over the period of 1995–2020. It further examines how environmental taxes and the dynamics of financial institutions moderate this relationship.
Design/methodology/approach
Using macro-level panel data, the analysis applies advanced econometric techniques, including FMOLS, DOLS, AMG, GMM and PSCE, followed by the Dumitrescu and Hurlin (2012) panel causality test. These methods allow for robust estimation of long-run relationships and causal linkages while accounting for cross-sectional dependence and heterogeneity.
Findings
The results reveal that the shadow economy significantly increases the ecological footprint, as shown in Figure 1. However, this adverse effect is mitigated by higher environmental taxes, while positively moderated by greater access to financial institutions and improved financial efficiency. While environmental taxes and financial depth/efficiency demonstrate a negative association with ecological footprint, financial depth exhibits a positive relationship.
Originality/value
This study contributes to the literature by integrating the shadow economy, environmental taxation, and financial development dimensions within a single empirical framework for the G7 economies. The findings provide actionable insights for policymakers seeking to design tax reforms and financial sector interventions that jointly curb both the shadow economy and environmental pressures.
This study investigates the relationship between the shadow economy and environmental degradation, measured through the ecological footprint, in G7 countries over the period of 1995–2020. It further examines how environmental taxes and the dynamics of financial institutions moderate this relationship.
Design/methodology/approach
Using macro-level panel data, the analysis applies advanced econometric techniques, including FMOLS, DOLS, AMG, GMM and PSCE, followed by the Dumitrescu and Hurlin (2012) panel causality test. These methods allow for robust estimation of long-run relationships and causal linkages while accounting for cross-sectional dependence and heterogeneity.
Findings
The results reveal that the shadow economy significantly increases the ecological footprint, as shown in Figure 1. However, this adverse effect is mitigated by higher environmental taxes, while positively moderated by greater access to financial institutions and improved financial efficiency. While environmental taxes and financial depth/efficiency demonstrate a negative association with ecological footprint, financial depth exhibits a positive relationship.
Originality/value
This study contributes to the literature by integrating the shadow economy, environmental taxation, and financial development dimensions within a single empirical framework for the G7 economies. The findings provide actionable insights for policymakers seeking to design tax reforms and financial sector interventions that jointly curb both the shadow economy and environmental pressures.
| Original language | English |
|---|---|
| Pages (from-to) | 1 |
| Number of pages | 21 |
| Journal | Journal of Economic Studies |
| DOIs | |
| Publication status | Published (VoR) - 13 Jan 2026 |