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Measuring the underground economy with the currency demand approach: a reinterpretation of the methodology, with an application to Italy

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Author Info

  • Guerino Ardizzi

    ()
    (Banca d'Italia)

  • Carmelo Petraglia

    ()
    (University of Basilicata)

  • Massimiliano Piacenza

    ()
    (University of Torino)

  • Gilberto Turati

    ()
    (University of Torino)

Abstract

We contribute to the debate on how to assess the size of the underground or shadow economy with a reinterpretation of the traditional Currency Demand Approach (CDA) Ã la Tanzi. We introduce three main innovations. First, we take as dependent variable in the money demand equation a direct measure of the value of cash transactions: the flow of cash withdrawn from current accounts relative to total non-cash payments. This avoids use of the Fisher equation and so overcomes two severe criticisms of the traditional CDA. Second, instead of the tax burden, usually taken as the main motive for non-compliance, we include among the covariates two direct indicators of detected tax evasion. Finally, we also control for the role of illegal economic activity, such as drug dealing and prostitution, which – jointly with the shadow economy – contributes to the larger aggregate of the unobserved economy and represents a significant component of total cash payments. We then propose an application of this “modified CDA” to a panel of 91 Italian provinces for the years 2005-2008.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 864.

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Date of creation: Apr 2012
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Handle: RePEc:bdi:wptemi:td_864_12

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Web page: http://www.bancaditalia.it
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Keywords: underground economy; currency demand approach; cash transactions; tax evasion; illegal production;

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References

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  1. Bruno Chiarini & Elisabetta Marzano, 2004. "Dimensione E Dinamica Dell'Economia Sommersa: Un Approfondimento Del Currency Demand Approach," Working Papers 4_2004, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  2. Michael Pickhardt & Jordi Sarda, . "The size of the underground economy in Germany: A correction of the record and new evidence from the Modified-Cash-Deposit-Ratio approach," Working Papers 201036, Institute of Spatial and Housing Economics, Munster Universitary.
  3. Charles Goodhart & Malte Krueger, 2001. "The impact of technology on cash usage," LSE Research Online Documents on Economics 25048, London School of Economics and Political Science, LSE Library.
  4. Matthias Drehmann & Charles Goodhart, 2000. "Is Cash Becoming Technologically Outmoded Or Does it Remain Necessary to Facilitate," FMG Discussion Papers dp358, Financial Markets Group.
  5. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Gilberto Turati, 2013. "L’economia non osservata fra evasione e crimine: una rivisitazione del Currency Demand Approach con una applicazione al contesto italiano," Rivista di Politica Economica, SIPI Spa, issue 1, pages 229-269, January-M.
  6. J. Ferwerda & I. Deleanu & B. Unger, 2010. "Revaluating the Tanzi-model to estimate the underground economy," Working Papers 10-04, Utrecht School of Economics.
  7. Maurizio Bovi & Laura Castellucci, 2001. "Cosa sappiamo dell'economia sommersa in Italia al di là dei luoghi comuni? Alcune proposizioni empiricamente fondate," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2001(6).
  8. Roberta Zizza, 2002. "Metodologie di stima dellÂ’economia sommersa: unÂ’applicazione al caso italiano," Temi di discussione (Economic working papers) 463, Bank of Italy, Economic Research and International Relations Area.
  9. Benno Torgler, 2003. "Tax Morale and Institutions," CREMA Working Paper Series 2003-09, Center for Research in Economics, Management and the Arts (CREMA).
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Citations

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Cited by:
  1. Friedrich Schneider, 2013. "The Shadow Economy in Colombia: Size and Effect on Economic Growth," Economics working papers 2013-19, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Ghezzi Leonardo & Ravagli Letizia & Rosignoli Stefano & Sciclone Nicola, 2013. "The estimate of the tax gap: An application in Tuscany," Politica economica, Società editrice il Mulino, issue 1, pages 91-118.
  3. Guerino Ardizzi & Carmelo Petraglia & Massimiliano Piacenza & Friedrich Schneider & Gilberto Turati, 2013. "Money Laundering as a Financial Sector Crime. A New Approach to Measurement, with an Application to Italy," Working papers 018, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
  4. Grech, Aaron George, 2014. "The demand for currency in Malta," MPRA Paper 53878, University Library of Munich, Germany.
  5. Contini, Bruno & Grand, Elisa, 2014. "Estimating Workforce Disposal in the Italian Labour Market," IZA Policy Papers 79, Institute for the Study of Labor (IZA).

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