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A modified Currency Demand Function and the Malaysian shadow economy: Evidence from ARDL bounds testing approach

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  • Gamal, Awadh Ahmed Mohammed
  • Rambeli, Norimah
  • Abdul Jalil, Norasibah
  • Kuperan Viswanathan, K.

Abstract

Improved estimates of the Malaysian Shadow Economy (SE), illegal money and corrections to the magnitude of SE using the ARDL technique based on the modified Currency Demand Function Model (CDFM) from 1972 to 2012 are provided in this paper. This study rectifies the failure in previous studies to capture the positive and symmetric relationships between the demand for money and per capita income. The use of the scale of real GDP in the Modified CDFM is necessary methodologically to obtain an accurate estimation of SE. This study combines the demand rate of deposits with circulated money as dependent variable, which is more liquid and thus may end up in SE. It considers inequality of the velocity of money in both economies (SE and the formal economy). The variables of opportunity cost of using money in their ratio level rather than logarithm form are used in the modified CDFM. The size of the SE in Malaysia has been fluctuating and averaged around 42.53% of GDP.

Suggested Citation

  • Gamal, Awadh Ahmed Mohammed & Rambeli, Norimah & Abdul Jalil, Norasibah & Kuperan Viswanathan, K., 2019. "A modified Currency Demand Function and the Malaysian shadow economy: Evidence from ARDL bounds testing approach," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 266-281.
    • Handle: RePEc:eee:ecanpo:v:64:y:2019:i:c:p:266-281
    DOI: 10.1016/j.eap.2019.10.001
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    More about this item

    Keywords

    Malaysian shadow economy; Illegal money; Stationarity; ARDL cointegration test; Modified currency demand function model approach;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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