Sovereign Debt Markets in Light of the Shadow Economy

30 Pages Posted: 6 Mar 2011 Last revised: 23 Oct 2015

See all articles by Raphael N. Markellos

Raphael N. Markellos

University of East Anglia (UEA) - Norwich Business School

Dimitris Psychoyios

University of Piraeus - Department of Industrial Management

Friedrich Schneider

Johannes Kepler University Linz - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)

Date Written: February 29, 2012

Abstract

We investigate the controversial role of the informal sector in the economy of 64 countries between 2003 and 2007 by focusing for the first time on the impact it has on sovereign debt markets. In addition to a standard ordered Probit regression, we employ two nonparametric neural network modelling techniques in order to capture possible complex interactions between our variables. Results confirm our main hypothesis that the informal sector has significant adverse effects on credit ratings and lending costs. MLP neural networks offer the best fit to the data, followed by the RBF neural networks and Probit regression, respectively. The results do not change with respect to the stage of economic development of a country and contradict views about the possibility of significant economic benefits arising from the informal sector. Our study has important implications, especially in the context of the ongoing sovereign debt crisis, since it suggests that a reduction in the informal sector of financially challenged countries is likely to help in relaxing credit risk concerns and cutting down lending costs. Finally, a decision tree analysis is used to exploit the inherent discreteness in the data and derive intuitive rules with respect to the level of the informal sector.

Keywords: Informal Sector, Credit Ratings, Sovereign Debt

JEL Classification: E26, E43, E44, F34, G15, G24, H63

Suggested Citation

Markellos, Raphael N. and Psychoyios, Dimitrios and Schneider, Friedrich G., Sovereign Debt Markets in Light of the Shadow Economy (February 29, 2012). Available at SSRN: https://ssrn.com/abstract=1773343 or http://dx.doi.org/10.2139/ssrn.1773343

Raphael N. Markellos (Contact Author)

University of East Anglia (UEA) - Norwich Business School ( email )

Norwich
NR4 7TJ
United Kingdom

Dimitrios Psychoyios

University of Piraeus - Department of Industrial Management ( email )

80, Karaoli & Dimitriou Str.
18534 Piraeus
Greece

Friedrich G. Schneider

Johannes Kepler University Linz - Department of Economics ( email )

Altenbergerstrasse 69
A-4040 Linz, 4040
Austria
+43 732 2468 8210 (Phone)
+43 732 2468 8208 (Fax)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Institute for the Study of Labor (IZA)

P.O. Box 7240
Bonn, D-53072
Germany

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