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Revealing Australia’s Underground Economy

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Author Info
Diab Harb () (Department of Treasury and Finance)
Prasad S. Bhattacharya () (Deakin University)

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Abstract

This study, using currency demand model, finds Australia’s underground economy to be around 2 to 3 per cent of gross domestic product. We extend the related literature (see, inter alia, Bajada, 1999 and Breusch, 2005) in three novel ways. First, we use Austrian levels of taxes and welfare payments as the minimum levels of taxes and welfare payments. Secondly, we employ the currency demand measurement as in Cagan (1958), i.e., cash and currencies as a proportion of total money supply. Third, we use Cagan’s original assumption regarding equalities of velocities of currencies in both the legal and illegal economies in order to estimate the underground economy.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2008_05eco.pdf
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Publisher Info
Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2008_05.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 33 pages
Date of creation: 14 Oct 2008
Date of revision:
Handle: RePEc:dkn:econwp:eco_2008_05

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Web page: http://www.deakin.edu.au/buslaw/aef/index.php

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Related research
Keywords: Australia; Underground Economy; Currency Demand Model; Cash and Currencies; Money Supply; Taxes; Welfare Payments; Velocity of Currency.;

Find related papers by JEL classification:
E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

References listed on IDEAS
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  1. Trevor Breusch, 2005. "Australia's Cash Economy: Are the estimates credible?," Macroeconomics 0509025, EconWPA, revised 23 Sep 2005. [Downloadable!]
  2. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May. [Downloadable!] (restricted)
  3. Schneider, Friedrich, 1986. " Estimating the Size of the Danish Shadow Economy Using the Currency Demand Approach: An Attempt," Scandinavian Journal of Economics, Blackwell Publishing, vol. 88(4), pages 643-68.
  4. Bajada, Christopher, 1999. "Estimates of the Underground Economy in Australia," The Economic Record, The Economic Society of Australia, vol. 75(231), pages 369-84, December.
  5. 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. [Downloadable!] (restricted)
  6. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Hill, Roderick & Kabir, Muhammed, 2000. "Currency Demand and the Growth of the Underground Economy in Canada, 1991-1995," Applied Economics, Taylor and Francis Journals, vol. 32(2), pages 183-92, February. [Downloadable!] (restricted)
  8. Phillip Cagan, 1958. "The Demand for Currency Relative to the Total Money Supply," Journal of Political Economy, University of Chicago Press, vol. 66, pages 303. [Downloadable!] (restricted)
  9. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  10. Klovland, Jan Tore, 1984. " Tax Evasion and the Demand for Currency in Norway and Sweden. Is There a Hidden Relationship?," Scandinavian Journal of Economics, Blackwell Publishing, vol. 86(4), pages 423-39.
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Statistics
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