ICT Diffusion, Financial Instability, and Shadow Economy: Panel Evidence from SAARC Economies

Abstract

The relevance of digital finance to developing economies has been bolstered by the rapid invention of ICTs in emerging markets. While widespread use of digital finance may increase credit availability, it may also increase the likelihood of systemic risk in the financial system. Furthermore, emerging economies face the challenges of shadow economic growth, which affects taxable income revenue and hinders the chances for financial inclusion. This research investigates how ICT diffusion has affected the shadow economy and financial stability in the SAARC economies, in line with SDG 9 for 2030 by the United Nations. We employed the DCCE and DK standard error estimate methods, which are resistant to CSD, to measure the relationship for 2005–2019 on two model frameworks. The stationarity and cointegration among the variables are verified using the second-generation unit root test and the Westerlund cointegration analysis. The Westerlund test has confirmed cointegration between the dependent and the independent variables. Long-term estimation also suggests that a rise in the spread of ICTs can help slow the expansion of the shadow economy in SAARC nations. Nevertheless, it also heightens the possibility of systemic risks and exacerbates financial instability. Regarding control variables, the study revealed that economic growth and FDI slowed the expansion of the shadow economy, whereas unemployment and inflation sped it up. The research results will shed light on how digital money affects the shadow economy and advances financial inclusion and stability in developing countries.