Digital Penetration and Its Role in Reducing the Shadow Economy in Europe and Central Asia

In this paper, we investigate the nexus between the digital economy and the shadow economy in 35 European and Central Asian countries from 2010 to 2018. Employing the two-step system Generalized Method of Moments (GMM) approach, the findings disclose a significant negative association between digital penetration and the shadow economy, suggesting that digitalization fosters formal economic activities by increasing transparency, limiting transaction costs, and promoting regulatory compliance.