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The Demand for Currency Approach and the Size of the Shadow Economy: A Critical Assessment

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  • Ahumada, Hildegart
  • Alvaredo, Facundo
  • Canavese, Alfredo J.

Abstract

A commonly used approach to measure the size of the shadow economy, known as "the monetary method", is based on econometric estimates of the demand for currency. These estimates are used to get the currency held by economic agents in excess of the amount they need to finance registered transactions. This excess of currency multiplied by the income-velocity of circulation (assumed to be equal in the registered and shadow economies) gives a measure of the hidden GDP. This paper shows that the monetary method only produces coherent estimates if the income-elasticity of the demand for currency is one and suggests a way to correct the estimated size of the shadow economy when such elasticity is not one. The correction is applied to existent measures for different countries.

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Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt6zn9p98b.

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Date of creation: 02 Jun 2006
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Handle: RePEc:cdl:oplwec:qt6zn9p98b

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References

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  1. Trevor Breusch, 2005. "Australia's Cash Economy: Are the estimates credible?," Macroeconomics 0509025, EconWPA, revised 23 Sep 2005.
  2. Trevor Breusch, 2005. "Australia's Cash Economy: Are the Estimates Credible?," The Economic Record, The Economic Society of Australia, vol. 81(255), pages 394-403, December.
  3. Friedrich Schneider & Christopher Bajada, 2003. "The Size and Development of the Shadow Economies in the Asia-Pacific," Economics working papers 2003-01, Department of Economics, Johannes Kepler University Linz, Austria.
  4. Fethi Ogunc & Gokhan Yilmaz, 2000. "Estimating The Underground Economy In Turkey," Discussion Papers 0004, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  5. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
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Citations

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Cited by:
  1. Friedrich G. Schneider, 2006. "Shadow Economies and Corruption all over the World: What do we really know?," Economics working papers 2006-17, Department of Economics, Johannes Kepler University Linz, Austria.
  2. José Brambila Macias & Guido Cazzavillan, 2008. "The Dynamics of Parallel Economies. Measuring the Informal Sector in México," Working Papers 2008_42, Department of Economics, University of Venice "Ca' Foscari".
  3. Tudorel ANDREI & Andreea Iluzia IACOB & Stelian STANCU & Bogdan OANCEA, 2010. "Quantitative Techniques used for the Informal Economy Analysis at National and Regional Level," Informatica Economica, Academy of Economic Studies - Bucharest, Romania, vol. 14(3), pages 153-164.
  4. Brambila Macias, Jose, 2008. "Remittances, Migration and Informality in Mexico. A Simple Model," MPRA Paper 8373, University Library of Munich, Germany.
  5. Friedrich Schneider & Andreas Bühn, 2013. "Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions," CESifo Working Paper Series 4448, CESifo Group Munich.
  6. M. Kabir Hassan & Jung Suk-Yu, 2010. "A Re-examination of the U.S. Underground Economy: Size, Estimation, and Policy Implications," NFI Working Papers 2010-WP-04, Indiana State University, Scott College of Business, Networks Financial Institute.
  7. Makochekanwa, Albert, 2010. "Estimating the size and trends of the second economy in Zimbabwe," MPRA Paper 37807, University Library of Munich, Germany.
  8. Friedrich Schneider, 2004. "Shadow Economies around the World: What do we really know?," IAW Discussion Papers 16, Institut für Angewandte Wirtschaftsforschung (IAW).
  9. Friedrich Schneider & Bettina Hametner, 2007. "The shadow economy in Colombia: size and effects on economic growth," Economics working papers 2007-03, Department of Economics, Johannes Kepler University Linz, Austria.
  10. Schneider, Friedrich, 2004. "The Size of the Shadow Economies of 145 Countries all over the World: First Results over the Period 1999 to 2003," IZA Discussion Papers 1431, Institute for the Study of Labor (IZA).
  11. Alexandru Adriana Anamaria & Dobre Ion & Ghinararu Catalin, 2009. "Estimating The Size Of Romanian Shadow Economy Using The Currency Demand Approach," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 2(1), pages 623-631, May.
  12. Schneider, Friedrich G. & Buehn, Andreas, 2007. "Shadow economies and corruption all over the world: revised estimates for 120 countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(9 (Versio), pages 1-53.

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