Unveiling the Relationship Between the Shadow Economy and Green Growth: A Cross‐Country Analysis Using the Method of Moments Quantile Regression

ABSTRACT The global economy has undergone significant transformations over the past decades to shift the focus from economic growth toward green growth, of which there is a balance between economic development and natural exploitation. Despite the intensive literature on the relationship between formal economic development and green growth, the role of the shadow or informal economy is under‐researched. Our study expanded the STIRPAT framework to examine the relationships between population, affluence factors (including shadow economy, trade openness, foreign direct investment), and technology on green growth. Data from 81 countries (2001–2017) were analyzed using the Method of Moments Quantile Regression approach to address the limitations of earlier studies that relied on mean‐based linear estimation methods. We found that population consistently has a positive impact on green growth, supporting the view that the population's production effect outweighs its consumption effect. We also discovered that a larger shadow economy is associated with higher obstacles to sustainable development, particularly in countries with lower levels of green development. We suggested that countries should strengthen regulatory frameworks, enhance transparency and accountability, and promote formalization and entrepreneurship, especially among small and medium enterprises. These measures can help mitigate the negative impacts of the shadow economy and accelerate the transition to sustainable practices.