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Currency Demand Modeling In Estimating The Underground Economy: A Critique on ‘Excess Sensitivity’ Method and Support for VAR Framework

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  • Jerry Marmen Simanjuntak

    ()
    (College of Business and Economics The Australian National University, Australia & ABFI Institute PERBANAS, Jakarta, Indonesia)

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    Abstract

    The ‘excess sensitivity’ as the method of estimating the underground economy by using currency modeling is found to be unreliable. In general, there are two major weaknesses in the method. First, the key assumption, in assuming the equality of velocity of money between the official economy and the underground economy, is very unrealistic. Second, the method is found to be non robust due to the unit measurement and scale change. More specifically, the application of the excess sensitivity method using the single-step error correction model (ECM) in Bajada’s paper is very weak because there is no cointegration analysis as the prerequisite of ECM modeling. In conclusion, the possibility of using a currency demand approach in estimating the size of the underground economy is still unclear like ‘black box’, and in particular, the excess sensitivity method should be thoroughly revised.

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    File URL: http://lp3e.fe.unpad.ac.id/wopeds/200806.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Padjadjaran University in its series Working Papers in Economics and Development Studies (WoPEDS) with number 200806.

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    Length: 48 pages
    Date of creation: Sep 2008
    Date of revision: Sep 2008
    Handle: RePEc:unp:wpaper:200806

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    Keywords: underground economy; currency demand; econometric models;

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    1. 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.
    2. David Giles, 1997. "Causality between the measured and underground economies in New Zealand," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 63-67.
    3. David E. A. Giles, 1999. "Modelling the hidden economy and the tax-gap in New Zealand," Empirical Economics, Springer, vol. 24(4), pages 621-640.
    4. Mariá Dolores Gadea & José Mariá Serrano-Sanz, 2002. "The hidden economy in Spain - A monetary estimation, 1964-1998," Empirical Economics, Springer, vol. 27(3), pages 499-527.
    5. Vito Tanzi, 1986. "The Underground Economy in the United States: Reply to Comments by Feige, Thomas, and Zilberfarb," IMF Staff Papers, Palgrave Macmillan, vol. 33(4), pages 799-811, December.
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    Cited by:
    1. Roberto Dell'Anno & Ferda Halicioglu, 2010. "An ARDL model of unrecorded and recorded economies in Turkey," Journal of Economic Studies, Emerald Group Publishing, vol. 37(6), pages 627-646, September.

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