RE-ESTIMATION AND MODELLING SHADOW ECONOMY IN MALAYSIA: DOES FINANCIAL DEVELOPMENT MITIGATE SHADOW ECONOMY?

The purpose of this study is to re-estimates the size of shadow economy in Malaysia and investigates the role play by the financial sector development in mitigating the size of shadow economy. Our results suggest that individual income tax burden has an impact on shadow economy in Malaysia; indicating that lower personal tax rate discourages people from participating in the shadow economy in Malaysia. On the other hand, increase in national income and government consumption also reduce shadow economy; while increase in misery increases shadow economy in Malaysia. One policy implication from this study is that the Malaysian government should embark on programs that can reduce the size of the shadow economy by removing barriers for easy access to the credit market and further reform of the financial sector should be the focus.