Currency Demand Modeling In Estimating The Underground Economy: A Critique on ‘Excess Sensitivity’ Method and Support for VAR Framework
AbstractThe ‘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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Bibliographic InfoPaper provided by Department of Economics, Padjadjaran University in its series Working Papers in Economics and Development Studies (WoPEDS) with number 200806.
Length: 48 pages
Date of creation: Sep 2008
Date of revision: Sep 2008
underground economy; currency demand; econometric models;
Find related papers by JEL classification:
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-29 (All new papers)
- NEP-MAC-2008-09-29 (Macroeconomics)
- NEP-MON-2008-09-29 (Monetary Economics)
- NEP-SEA-2008-09-29 (South East Asia)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Modelling the hidden economy and the tax-gap in New Zealand,"
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