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Measuring the Shadow Economy with the Currency Demand Approach - A Reinterpretation of the methodology, with an application to Italy

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Author Info

  • Guerino Ardizzi

    () (Bank of Italy)

  • Carmelo Petraglia

    () (University of Napoli Federico II)

  • Massimiliano Piacenza

    () (Department of Economics and Public Finance "G. Prato", University of Torino)

  • Gilberto Turati

    () (Department of Economics and Public Finance "G. Prato", University of Torino)

Abstract

We contribute to the debate on how to assess the size of the shadow economy by proposing a reinterpretation of the traditional Currency Demand Approach (CDA) a là Tanzi. In particular, we introduce three main innovations. First, we take a direct measure of cash transactions (the flow of cash withdrawn from bank accounts relative to total noncash payments) as the dependent variable in the money demand equation. This allows us to avoid using the Fisher equation, overcoming two severe critiques to the traditional CDA. Second, we include among covariates two distinct measures of ‘detected’ tax evasion, in place of the tax burden level. Finally, we control also for a new ‘criminal’ component of the shadow economy, considering money demand for illegal activities like drug dealing and prostitution. We propose an application of this ‘modified – CDA’ to a panel of 91 Italian provinces for the years 2005-2008.

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File URL: http://web.econ.unito.it/prato/papers/n22.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Former Department of Economics and Public Finance "G. Prato", University of Torino in its series Working papers with number 22.

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Length: 25 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:tur:wpaper:22

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Keywords: Shadow economy; Currency demand approach; Cash transactions; Evasion; Crime;

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  1. Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2009. "How do institutions affect corruption and the shadow economy?," International Tax and Public Finance, Springer, vol. 16(6), pages 773-796, December.
  2. Lippi, Francesco & Secchi, Alessandro, 2006. "Technological change and the demand for currency: An analysis with household data," CEPR Discussion Papers 6023, C.E.P.R. Discussion Papers.
  3. Pickhardt, Michael & Sardà Pons, Jordi, 2010. "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 2072/148479, Universitat Rovira i Virgili, Department of Economics.
  4. Axel Dreher & Friedrich Schneider, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," CREMA Working Paper Series 2006-01, Center for Research in Economics, Management and the Arts (CREMA).
  5. Matthias Drehmann & Charles Goodhart, 2000. "Is Cash Becoming Technologically Outmoded Or Does it Remain Necessary to Facilitate," FMG Discussion Papers dp358, Financial Markets Group.
  6. Friedrich Schneider, 2010. "The Influence of Public Institutions on the Shadow Economy: An Empirical Investigation for OECD Countries," Review of Law & Economics, De Gruyter, vol. 6(3), pages 7.
  7. Benno Torgler, 2003. "Tax Morale and Institutions," CREMA Working Paper Series 2003-09, Center for Research in Economics, Management and the Arts (CREMA).
  8. Alvarez, Fernando E & Lippi, Francesco, 2007. "Financial Innovation and the Transactions Demand for Cash," CEPR Discussion Papers 6472, C.E.P.R. Discussion Papers.
  9. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Books, National Bureau of Economic Research, Inc, number caga58-1, October.
  10. Pickhardt, Michael & Sarda, Jordi, 2010. "The size of the underground economy in Germany: A correction of the record and new evidence from the Modified-Cash-Deposit-Ratio approach," CAWM Discussion Papers 36, Center of Applied Economic Research Münster (CAWM), University of Münster.
  11. Malte Krueger & Charles Goodhart, 2001. "The Impact of Technology on Cash Usage," FMG Discussion Papers dp374, Financial Markets Group.
  12. 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.
  13. Hildegart Ahumada & Facundo Alvaredo & Alfredo Canavese, 2007. "The Monetary Method And The Size Of The Shadow Economy: A Critical Assessment," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(2), pages 363-371, 06.
  14. Michael Pickhardt & Jordi Sarda Pons, 2006. "Size and scope of the underground economy in Germany," Applied Economics, Taylor and Francis Journals, vol. 38(14), pages 1707-1713.
  15. repec:cup:cbooks:9780521814089 is not listed on IDEAS
  16. Joras Ferwerda & Ioana Deleanu & Brigitte Unger, 2010. "Revaluating the Tanzi-Model to Estimate the Underground Economy," Working Papers 10-04, Utrecht School of Economics.
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