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| Ceyhun Elgin and Ferda Erturk |
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| ''Is Informality a Barrier to Convergence?'' |
| ( 2016, Vol. 36 No.4 ) |
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| 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. |
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| Keywords: convergence, two-sector DGE models, informal sector, pane data |
JEL: O4 - Economic Growth and Aggregate Productivity: General
E1 - General Aggregative Models: General |
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| Manuscript Received : Sep 29 2016 | | Manuscript Accepted : Dec 29 2016 |
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