The spillover effects of financial system and tourism on the informal economies: Evidence from Turkey

Abstract

This article examines the impact of the financial system and tourism on the informal economy in Turkey, a country known for its emerging economy, its status as a sun-sea-culture destination, and its substantial informal sector. Time series data from 1960 to 2019 will be used to provide real-world evidence. Both dynamic and fully modified ordinary least squares estimations will be used, in line with second-generation econometric techniques that take into account structural breaks in the series for unit root and cointegration tests. The results highlighted an inverted U-shaped relationship between the financial system and the informal economy, in contrast to a U-shaped relationship between tourism volume and the informal economy. These outcomes imply the necessity of financial inclusion and the establishment of efficient mechanisms to minimize informality. Moreover, policymakers in Turkey should prioritize bolstering the number of firms in the sector, enhancing sustainability, and promoting local sourcing and certification systems. Additionally, policymakers should prioritize enhancing affordable financing sources for small-to-medium-sized enterprises, particularly those in the tourism sector, to facilitate their transition into the formal economy.