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Ceyhun Elgin and Ferda Erturk
''Is Informality a Barrier to Convergence?''
( 2016, Vol. 36 No.4 )
In this paper we ask whether informal economy acts as a barrier to growth of GDP per-capita. Cross-country panel regressions for the period between 1960 and 2012 including 160 countries provide evidence for a robust negative relationship between size of informal economy and relative per capita income. Building on this evidence we simulate a simple two-sector (formal and informal) dynamic general equilibrium model and show that under the presence of an informal sector a larger fraction of the observed per capita income differences across countries can be accounted for.
Keywords: convergence, two-sector DGE models, informal sector, pane data
JEL: O4 - Economic Growth and Aggregate Productivity: General
E1 - General Aggregative Models: General
Manuscript Received : Sep 29 2016 Manuscript Accepted : Dec 29 2016

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