SHADOW ECONOMY AND FOREIGN DIRECT INVESTMENTS: AN EMPIRICAL ANALYSIS FOR THE CASE OF ROMANIA

<p><em>Shadow economy (SE)<strong> </strong>represents a controversial phenomenon, present more or less in all economies, whose empirical estimates should be regarded with due reserve.</em></p> <p><em>The main goal of this paper is to analyze the nature of the relationship between Romanian shadow economy, expressed as % of the official GDP and the foreign direct investments (FDI) using two causality analysis methods, namely the Granger causality analysis method and the Toda-Yamamoto procedure, based on quarterly data, over the period 2000-2010. The paper will also try to particularize the implications of this relationship on the sustainable development of the Romanian economy. </em></p> <p><em>For that purpose we will use the shadow economy series estimated in a previous article using one of the monetary approaches, the currency demand approach, based on econometrical methodology of error correction models and co-integration. The quantitative demarche of shadow economy estimation is detailed in Alexandru (Davidescu) and Dobre (2013). </em></p> <p><em>The empirical results highlight a unidirectional short-run causality that runs only from foreign direct investments to the shadow economy. The impulse responses function indicates a short-run negative relationship between FDI and SE.</em>