Abstract

This study examines the nexus between non-performing loans (NPLs) and the shadow economy, as well as macroeconomic and bank-specific variables, in 25 emerging countries from the period starting 1998 to 2017 period. The Driscoll-Kraay standard errors and a fixed effect estimator have been employed, and the results suggest that NPLs have a positive relationship with the shadow economy as well as inflation and trade openness. In contrast, GDP, unemployment, household consumption, credit-to-deposit ratio, broad money, bank return on equity, and overall economic freedom index have a negative effect on NPLs. Our results demonstrate the complex nature of non-performing loans, which are influenced by both microeconomic and macroeconomic factors.