Fiscal Consolidation, Shadow Economy and the Sustainability of Private Consumption: Further Evidence from Selected Eurozone Economies

    • Bologna October 2016
    • Presentation speakers
      • Ioannis Kostakis, Harokopio University, Athens
      • Eleni Theodoropoulou, Harokopio University, Athens


    According to neoclassical perception the growth of private consumption is higher during (or after) fiscal consolidation periods via the multiplier effect of a government cut. Private consumption booms, therefore are more likely to be associated with large cuts in deficits by either increasing taxes or by reducing transfers. On the other hand, shadow economy and corruption issues have only lately gained economic researchers’ interest showing a negative effect on real economy. This research uses an alternative growth of private consumption approach using dynamic panel data regression analysis of 17 (14 excluding Estonia, Latvia and Lithuania) Eurozone countries and endeavors to shed light on these issues. Empirical findings show that consolidation periods experience a marginal lower private consumption growth, questioning the generality of neoclassical theory implication. Furthermore, as expected, informal economy leads to a higher private consumption, but with a high cost for public economics