Informality and Bank Stability

While financial development (FD) has been widely studied in the literature as a determinant of informal sector size, there has been no focus on the role of financial stability. We find that the stability of the banking sector has a significant and robust negative effect on informality across countries. Using a recently available testing methodology based on a heteroskedasticity-robust Lasso we also find strong support for Rule of Law as a key determinant of informal sector size, and some evidence for the effect of FD