A Study On Underground Economy And The Impact On Financial Development

In the economic transformation stage, China is suffering the serious situation of the entity’s economic malaise. To stimulate economic growth, release a large amount of money leads to excess liquidity, and an abnormal phenomenon that the banks, the stock market, the small and medium-sized enterprises are short of money synchronously. Due to the serious excess capacity in our country, a considerable amount of money deposits in the field of circulation because of low velocity, lots of money exist in the field of production are intercepted by interest groups and corrupt officials, used for unproductive speculation or transfer abroad, and large or private enterprises which with surplus funds are afraid to expand investment. Funding mismatch caused by capital profit-driven reduces the use efficiency of funds, the lack of money applied in the development of the real economy and improvement of social security will restricts economic development. Evidently, funds are closely linked with the underground economy. It is the original intention that this paper study the impact underground economic has on financial development in our country.Firstly, this paper heckles the research about underground economy carried out by experts and scholars at home and abroad, focus on studying the foreign research on the relationship between underground economy and financial development, then summarizes the status-quo of financial development in our country, and analyzes the mechanism of underground economy influence the financial development. Secondly, uses the MIMIC model to estimate the underground economy scale in China with provincial panel data during1994-2012, finds that the underground economy scale is lager on the east coast, as well as part of the middle and lower reaches of the Yellow River, the middle and lower reaches of the Yangtze river and the northwest region, in addition, there is a certain correlation between underground economy and financial development. Thirdly, using the estimated underground economy scale and available financial indicators data, establish the fixed effect model and the generalized moment estimation model to have empirical analysis. The main conclusions are:underground economy has non-linear effects on financial development. a moderate amount of underground economy is conducive to financial development, while as excessive underground economy exits negative impacts; financial repression will aggravate the underground economy. Therefore, it is necessary to inhibit the expansion of underground economy scale and restrain within a certain range. Lastly, this paper puts forward some policy suggestions that strengthen supervision of the underground economy beneficial to economic development and crack down on which is harmful. The most fundamental way is to accelerate the institution reform, consummate social security system, reduce the gap between rich and poor and improve people’s quality of life.