Summary
Most economists recognized that macroeconomic variables are characterized by nonlinearity rather than growing linearly or monotonically over time. We conjecture that if gross domestic product (GDP) grows in a nonlinear fashion, any economic variables derive and depend on it will also be nonlinear. One particular macroeconomic variable is the size of the shadow economy. Nevertheless, the nonlinear relationship between shadow economy and economic development is also likely. This paper investigates the nonlinear relationship between the size of the shadow economy and the level of economic development in Malaysia. Our results suggest that the size of the shadow economy in Malaysia exhibit an inverted U-shaped curve, thus, imply a nonlinear relationship between shadow economy and economic development.
