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New estimates of U.S. currency abroad, the domestic money supply and the unreported Economy

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  • Feige, Edgar L.

Abstract

New Estimates of U.S. Currency Abroad, the Domestic Money Supply and the Unreported Economy Edgar L. Feige * Abstract Despite financial innovations that have created important new substitutes for cash usage, per capita holdings of U.S. currency amount to $2950. Yet American households and businesses admit to holding only 15 percent of the currency stock, leaving the whereabouts of 85 percent unknown. Some fraction of this unaccounted for currency is held abroad (the dollarization hypothesis) and some is held domestically undeclared, as a store of value and a medium of exchange for transactions involving the production and distribution of illegal goods and services, and for transactions earning income that is not reported to the IRS (the unreported economy hypothesis). We find that the percentage of U.S. currency currently held overseas is between 30-37 percent rather than the widely cited figure of 65 percent. This finding is based on the official Federal Reserve/Bureau of Economic Analysis data which is a proxy measure of the New York Federal Reserve’s (NYB) “confidential” data on wholesale currency shipments abroad. We recommend that the NYB data be aggregated so as to circumvent confidentiality concerns, and be made readily available to all researchers in order to shed greater light on the questions of how much U.S. currency is abroad and on the particular location of overseas U.S. dollars. The newly revised official estimates of overseas currency holdings are employed to determine the Federal Reserve’s seigniorage earnings from 1964-2010, which have provided a $287 billion windfall for U.S. taxpayers. Overseas currency stock data are also used to derive estimates of the domestically held stock of currency as well as narrow and broad measures of domestic monetary aggregates. These domestic monetary aggregates are believed to be better predictors of future economic activity than traditional monetary aggregates and are tested to determine their ability to predict fluctuations in real output and prices. Domestic cash holdings are finally used to estimate the size of the U.S. unreported economy as measured by the amount of income that is not properly reported to the IRS. By 2010, we estimate that legal and illegal source unreported income” is $1.9 - $2.4 trillion, implying a “tax gap” in the range of $400- $550 billion. Currently, we estimate that 18-23 percent of total reportable income is not properly reported to the IRS.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34778.

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Date of creation: Sep 2011
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Handle: RePEc:pra:mprapa:34778

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Keywords: Overseas currency; currency abroad; underground economy; unreported economy; domestic money supply; tax gap; tax evasion; cash payments; monetary aggregates;

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References

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  1. Case M. Sprenkle, 1993. "The Case of the Missing Currency," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 175-184, Fall.
  2. Feige, Edgar L., 1997. "Revised estimates of the Underground Economy: Implications of US Currency held abroad," MPRA Paper 13805, University Library of Munich, Germany.
  3. Edgar L. Feige, 2005. "Overseas Holdings Of U.S.Currency And The Underground Economy," Macroeconomics 0501022, EconWPA.
  4. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, June.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  6. Feige, Edgar L & Pearce, Douglas K, 1979. "The Casual Causal Relationship between Money and Income: Some Caveats for Time Series Analysis," The Review of Economics and Statistics, MIT Press, vol. 61(4), pages 521-33, November.
  7. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
  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.
  9. Feige, Edgar L. & Cebula, Richard, 2011. "America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S," MPRA Paper 34781, University Library of Munich, Germany.
  10. Edgar L. Feige, 1986. "A Re-Examination of the "Underground Economy" in the United States: A Comment on Tanzi," IMF Staff Papers, Palgrave Macmillan, vol. 33(4), pages 768-781, December.
  11. Robert B. Avery & Gregory E. Elliehausen & Arthur B. Kennickell & Paul A. Spindt, 1986. "The use of cash and transaction accounts by American families," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 87-108.
  12. Yunus Aksoy & Tomasz Piskorski, 2004. "U.S. Domestic Money, Inflation and Output," Macroeconomics 0401007, EconWPA.
  13. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
  14. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
  15. Feige, Edgar L, 1994. "The Underground Economy and the Currency Enigma," Public Finance = Finances publiques, , vol. 49(Supplemen), pages 119-36.
  16. Richard G. Anderson & Robert H. Rasche, 1997. "Construction of an estimated domestic monetary base using new estimates of foreign holdings of U.S. currency," Working Papers 1997-019, Federal Reserve Bank of St. Louis.
  17. 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.
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Cited by:
  1. Ruth Judson, 2012. "Crisis and calm: Demand for U.S. currency at home and abroad from the fall of the Berlin Wall to 2011," International Finance Discussion Papers 1058, Board of Governors of the Federal Reserve System (U.S.).
  2. Feige, Edgar L. & Cebula, Richard, 2011. "America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S," MPRA Paper 34781, University Library of Munich, Germany.
  3. Feige, Edgar L., 2012. "The myth of the “cashless society”: How much of America’s currency is overseas?," MPRA Paper 42169, University Library of Munich, Germany.

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